On October 1, 2013, Pennington Company issued an €80,000, 10%, nine-month interest-bearing note. If Pennington Company is preparing financial statements at December 31, 2013, the adjusting entry for accrued interest will include a

Question

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The adjusting entry for accrued interest will include a debit to Interest Expense for the amount of interest accrued from October 1 to December 31, which is 3 months. The calculation for accrued interest is:

€80,000 x 10% x 9/12 = €6,000 (total interest for 9 months)
€6,000 x 3/9 = €2,000 (interest accrued for 3 months)

Therefore, the entry for accrued interest at December 31, 2013, would be:

Debit Interest Expense €2,000 
Credit Interest Payable €2,000

Option A is incorrect because it shows a credit to Notes Payable, which is not necessary for the adjusting entry for accrued interest. Option C is incorrect because it shows a credit to Interest Payable for an amount larger than the accrued interest. Option D is incorrect because it shows a debit to Interest Expense for an amount larger than the accrued interest.

On October 1, 2013, Pennington Company Issued an €80,000, 10