Preston Corporation issues a $3,000 note to Fulton Corporation on March 1, which carries interest at an annual rate of 5%. Interest is payable when the note matures on June 30. What entry will Fulton make at its year-end, April 30, if interest on the note has not previously been accrued?

Question

Quizplus · Accepted Answer

Since interest on the note has not previously been accrued, as of April 30, there would be one month (March) of interest accrued that needs to be recorded. Option B correctly records the accrued interest expense of $12.50 (=$3,000 x 5% x 1/12) and the corresponding liability for the accrued interest payable. Option A records the note payable and interest revenue, but does not recognize the need for accruing interest expense. Option C records the note payable and does not recognize the need for accruing interest expense or interest revenue. Option D only recognizes interest revenue and does not record the note payable or the accrued interest expense.

Preston Corporation Issues a $3,000 Note to Fulton Corporation on March