Michigan Bank lends Canton Furniture Company $100,000 on December 1. Canton Furniture Company signs a $100,000, 8%, 4-month note. The entry made by Canton Furniture Company on December 31 to record the accrued interest on the note would be:

Question

Quizplus · Accepted Answer

The interest on the note can be calculated as follows:

Interest = Principal x Rate x Time
= $100,000 x 0.08 x (1/12) 
= $667

Since the note was issued on December 1 and the interest is being accrued at the end of the month (December 31), the company would owe one month's worth of interest, which is $667.

The entry to record the accrued interest would be:

Debit: Interest Expense - $667 
Credit: Interest Payable - $667

Option A is correct as it correctly debits the interest expense account and credits the interest payable account for the accrued interest of $2,000 ($667 x 3 months).

Michigan Bank Lends Canton Furniture Company $100,000 on December 1