On June 1,2016,Mighty Fast Flooring issued a 10-month,9 percent note for $4,000.The note was recorded in the Notes Payable-Trade account.The adjusting entry on December 31 to record the interest accrued (owed)on the note is:
A) a debit to Interest Expense for $210 and a credit to Interest Payable for $210.
B) a debit to Interest Income for $210 and a credit to Interest Receivable for $210.
C) a debit to Interest Expense for $360 and a credit to Interest Payable for $360.
D) a debit to Interest Expense for $210 and a credit to Notes Payable-Trade for $210.

Question

Quizplus · Accepted Answer

To accrue interest expense for the 10-month, 9 percent note, the following calculation is used:
Interest expense = principal x annual interest rate x time
Time = number of days between note issuance and December 31, divided by 365
Time = 213 days / 365 = 0.5849
Interest expense = $4,000 x 0.09 x 0.5849 = $210
The adjusting entry is a debit to Interest Expense for $210 and a credit to Interest Payable for $210. This correctly records the interest expense that has accrued but not yet been paid, and establishes a liability for future payment.

On June 1,2016,Mighty Fast Flooring Issued a 10-Month,9 Percent Note