Watauga County Bank agrees to lend Farm Café $500000 on January 1 2021.Farm Café signs a $500000 6% 9-month note.Use the following tabular analysis to record the required adjustment if Farm Café prepares financial statements on June 30 2021:

Question

Quizplus · Accepted Answer

Since Farm Café prepared financial statements on June 30, 2021, which is 6 months after the note was issued, they must adjust their financial statements to reflect the accrued interest for these 6 months. The interest on the loan is calculated as follows:

Interest = Principal x Rate x Time
Interest = $500,000 x 6% x (6/12)
Interest = $15,000

Farm Café would record an increase to Interest Expense (an expense account) and an increase to Interest Payable (a liability account) for $15,000 to reflect the accrued interest for the 6 months. Therefore, choice A is the correct answer.

Watauga County Bank Agrees to Lend Farm Café $500000 on January