On October 1, 2015, Pennington Company issued a $90,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2015, the adjusting entry for accrued interest will include a:

Question

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The interest on the note is calculated as follows:

Principal ($90,000) x Annual Interest Rate (10%) x Time in Fraction of a Year (3/12) = $2,250

Since the note was issued on October 1 and the financial statements are being prepared on December 31, only three months of interest have accrued.

Therefore, the adjusting entry on December 31 would involve debiting Interest Expense for $2,250 and crediting Interest Payable for $2,250. The entry would not involve Notes Payable as the principal amount of the note has not changed.

On October 1, 2015, Pennington Company Issued a $90,000, 10