Glaus Corp.signed a three-month, zero-interest-bearing $152,205 note on November 1, 2010 for the purchase of $150,000 of inventory.The adjusting entry made at December 31, 2010 will include a

Question

Quizplus · Accepted Answer

Since the note is zero-interest-bearing, there is no interest expense to record until the note matures. The adjusting entry on December 31, 2010, will include a debit to Inventory and a credit to Accounts Payable for the purchase of inventory. The note payable will also need to be adjusted to reflect the interest that has accrued. The formula for calculating the interest is Principal x Rate x Time. In this case, the Principal is $150,000, the Rate is 0 (since it is zero-interest-bearing), and the Time is 2/12 (since two months have passed since the note was issued). Therefore, the interest accrued is $0. The adjusting entry will include a debit to Interest Expense for $1,470 ($152,205 x 12% x 1/12) to reflect the interest that will be paid when the note matures.