On October 1, 2010, Pennington Company issued a $40,000, 10%, nine-month interest-bearing note. If the Pennington Company is preparing financial statements at December 31, 2010, the adjusting entry for accrued interest will include a:

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The adjusting entry for accrued interest at December 31, 2010 will include a debit to Interest Expense for the amount of interest incurred from October 1 to December 31, which is $1,000 ($40,000 x 10% x 3/12). There is no need to credit Notes Payable or credit Interest Payable at this point, as both of these accounts will be adjusted when the note matures and/or is paid off.

On October 1, 2010, Pennington Company Issued a $40,000, 10