On October 1, 2018, Pennington Company issued a $90,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2018, the adjusting entry for accrued interest will include a:

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The adjusting entry for accrued interest will involve recognizing the interest expense incurred from October 1 to December 31, which is 3 months or 0.25 of a year. The calculation will be: $90,000 x 10% x 0.25 = $2,250. Therefore, the entry will be a debit to Interest Expense for $2,250 to recognize the expense incurred and a credit to Interest Payable for the same amount to recognize the liability at year-end. This means that choices A and C are incorrect, and choice D overstates the amount of interest expense.

On October 1, 2018, Pennington Company Issued a $90,000, 10