Flower Mart borrows $240,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each subsequent quarter.
What will Flower Mart need to accrue on August 31, assuming that no accrual had been made since the last interest payment?
A) $6,000; Decrease liabilities and decrease cash
B) $2,000; Increase liabilities, increase expenses
C) $1,500; Decrease liabilities, decrease cash
D) $1,000; Increase expenses

Question

Quizplus · Accepted Answer

Interest is calculated by multiplying the loan amount ($240,000) by the interest rate (5%) and then by the portion of the year outstanding (2/12), or $2,000 for July and August interest owed. The company needs to reflect the outstanding interest owed (accrued interest) by increasing liabilities and interest expense.

Flower Mart Borrows $240,000 on July 1 with a Short-Term