Jenni's Music Store borrowed $12,000 from the bank signing a 9%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be
A) Debit Interest Expense, $1,080; Credit Interest Payable, $1,080.
B) Debit Interest Expense, $90; Credit Interest Payable, $90.
C) Debit Note Payable, $1,080; Credit Cash, $1,080.
D) Debit Cash, $270; Credit Interest Payable, $270.

Question

Quizplus · Accepted Answer

The interest on a 9%, 3-month note for one month (September) can be calculated as:

Interest = Principal x Rate x Time
Interest = $12,000 x 0.09 x (30/360) 
Interest = $90

Therefore, the adjusting entry on September 30 would be to record the interest expense and increase the interest payable:

Debit Interest Expense $90
Credit Interest Payable $90

Jenni's Music Store Borrowed $12,000 from the Bank Signing a 9