Speedy Corporation borrowed $200,000 on March 1, 2012, signing a one-year, 7% note payable to First State Bank. The adjusting entry required on December 31, 2012, includes a:
A) debit to Interest Expense of $14,000.
B) debit to Cash of $240,000.
C) credit to Interest Payable of $11,667.
D) credit to Interest Revenue of $11,667.

Question

Quizplus · Accepted Answer

The adjusting entry required on December 31, 2012, is necessary to record the interest expense that has been incurred but has not yet been paid as of the end of the accounting period.

To calculate the interest expense, we need to use the formula:

Interest Expense = Principal x Rate x Time

Where:

Principal = $200,000 
Rate = 7% 
Time = 10/12 (since the loan was outstanding for 10 months out of a 12-month period)

Interest Expense = $200,000 x 7% x (10/12) = $11,667

Therefore, the adjusting entry required on December 31, 2012, is:

Debit Interest Expense $11,667 
Credit Interest Payable $11,667

Option C is the only one that includes a credit to Interest Payable, which is necessary to record the liability for the interest that has been incurred but not yet paid.

Speedy Corporation Borrowed $200,000 on March 1, 2012, Signing a One-Year