Pegasus Corp.signed a three-month,zero-interest-bearing $253,315 note on November 1,2016 for the purchase of $250,000 of inventory.If Pegasus makes adjusting entries only at the end of the year,the adjusting entry made at December 31,2016 will include a ________.
A)debit to Note Payable for $2,210
B)debit to Interest Expense for $2,210
C)credit to Note Payable for $2,210
D)credit to Interest Expense for $2,210

Question

Quizplus · Accepted Answer

Since the note is zero-interest-bearing, Pegasus did not record any interest expense throughout the year. Therefore, at the end of the year, an adjusting entry is necessary to recognize the interest expense. The interest expense can be calculated by multiplying the note amount by the interest rate and the time period (in this case, 253,315 x 0 x 2/12 = 0). The adjusting entry will include a debit to Interest Expense for $2,210 and a credit to Note Payable for $2,210 to reflect the accrual of interest expense. However, since the note is zero-interest-bearing, there will be no actual cash payment for interest.