Mount Allison University borrowed $20,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements and uses months rather than days to calculate interest, the adjusting entry that the company should make for interest on September 30, would be
A) debit Interest Expense, $400; credit Interest Payable, $400.
B) debit Interest Expense, $100; credit Interest Payable, $100.
C) debit Note Payable, $1,200; credit Cash, $1,200.
D) debit Cash, $100; credit Interest Payable, $100.

Question

Quizplus · Accepted Answer

The interest for one month on a $20,000 note at 6% annual interest is calculated as ($20,000 * 0.06) / 12 = $100. This is the amount of interest expense that needs to be recognized for the month of September.

Mount Allison University Borrowed $20,000 from the Bank Signing a 6