On October 1,2018,Saddleback,Inc.negotiates with its bank to borrow $18,000 cash on a one-year note.The bank charges 5% interest.Interest payments are to be made in two installments,on March 31 and September 30.The principal is to be repaid on September 30,2019,the maturity date.What adjusting entry needs to be recorded of December 31,2018?
A)Debit Interest Expense and credit Interest Payable for $450.
B)Debit Interest Expense and credit Interest Payable for $225.
C)Debit Interest Expense and credit Interest Payable for $900.
D)Debit Interest Payable and credit Interest Expense for $900.

Question

Quizplus · Accepted Answer

The amount of interest expense that has accrued as of December 31,2018,is computed as follows: $18,000 × 0.05 × 3 / 12 = $225.Since interest has accrued but has not yet been paid,Interest Expense must be debited and Interest Payable must be credited for $225.