On October 1, Steve's Carpet Service borrows €400,000 from First National Bank on a 3-month, €400,000, 8% note.What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?

Question

Quizplus · Accepted Answer

On December 31, Steve's Carpet Service must make an adjusting entry to accrue interest expense for the three months that the note was outstanding.

To calculate the interest expense, we first need to determine the interest rate per month. Since the note has an 8% annual interest rate, the monthly interest rate is (8% / 12) = 0.67%.

Next, we need to calculate the total interest expense for the three months. This is done by multiplying the principal amount by the monthly interest rate and the number of months:

Interest expense = €400,000 x 0.67% x 3 = €8,040

The journal entry to record this would be:

Interest Expense           €8,040
   Interest Payable                   €8,040

Option C depicts this entry.

On October 1, Steve's Carpet Service Borrows €400,000 from First