Smith borrows $10 000 on a one- year loan payable that charges interest at 12% per year. He will repay the principal and interest at the end of the one- year period. Smith makes accrual adjustments and each month, he records interest expense of $1 200.

Question

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The monthly interest expense should be $100, not $1,200. The annual interest is $1,200 ($10,000 * 12%), so the monthly interest is $1,200 / 12 = $100.

Smith Borrows $10 000 on a One- Year Loan Payable