Edmond Office Equipment borrowed $10,000 at 10% interest on July 1.Principal and interest are due on December 31.The company's fiscal year ends on October 31.What adjusting entry should be made on that date?

Question

Quizplus · Accepted Answer

The adjusting entry should be made on October 31, which is the end of the fiscal year. Since the interest expense has been incurred for the period from July 1 to October 31, it needs to be recognized as an expense in the books of accounts. 
The interest expense for 4 months (July to October) can be calculated as:
Interest expense = Principal x Rate x Time = $10,000 x 10% x (4/12) = $333.33
Therefore, the adjusting entry on October 31 should be:
Interest Expense Dr. $333.33
Interest Payable Cr. $333.33 
Option C represents this entry, so it is the correct answer.

Edmond Office Equipment Borrowed $10,000 at 10% Interest on July