A business borrows $100,000 from a bank on July 1, 2018. Under the agreement with the bank, the loan must be repaid in full on June 30, 2019, with interest at 6% a year. The business wants to prepare financial statements for the year ended December 31, 2018. How much interest expense should it report for that year?

Question

Quizplus · Accepted Answer

Interest of $3,000 would need to be accrued; the business incurred interest expense for July through December because of the loan from the bank. The accrual decreases equity (Interest expense) and increases a liability (Interest payable). The calculation is $100,000 x 6% x 6/12.

A Business Borrows $100,000 from a Bank on July 1