Houston Company borrowed $20,000 from Dallas Company on March 1, Year 1. Houston issued a note payable that had a one-year term and the annual interest rate is 8%. How will the necessary adjustment, dated December 31, Year 1, affect the Year 1 financial statements?

Question

Quizplus · Accepted Answer

At the end of the year, Houston will need to accrue interest expense for the nine months that have passed since the note was issued. The amount of interest expense will be calculated as follows: $20,000 x 8% x 9/12 = $1,200. This adjustment will increase Houston's liabilities (due to the accrual of interest payable) and increase expenses (due to the recognition of interest expense). Therefore, choice A is the correct answer.

Houston Company Borrowed $20,000 from Dallas Company on March 1