On October 1,2015,Attra Inc.borrows $200,000 on a three-year note that requires the company to pay 6% interest on March 31 and September 30.On December 31,2015,the adjusting entry to accrue interest on the note should debit:
A) Interest Expense and credit Interest Payable for $3,000.
B) Interest Payable and credit Interest Expense for $3,000.
C) Interest Expense and credit Cash for $6,000.
D) Interest Expense and credit Interest Payable for $6,000.

Question

Quizplus · Accepted Answer

The adjusting entry on December 31, 2015, is needed because the interest payment is due on March 31, 2016, which is after the end of the accounting period. Therefore, the company needs to accrue interest expense incurred in the current period (January 1, 2015, to December 31, 2015).

The calculation for interest expense is: 
$200,000 x 6% x 9/12 (since the note is for three years, and the interest payments are semi-annual, with a six-month interval between them) = $9,000

The amount of interest expense that needs to be accrued for the period from October 1, 2015, to December 31, 2015, is $9,000 x 3/18 = $1,500.

Since the interest payment is not yet due, the entry should debit Interest Expense and credit Interest Payable for the amount of the accrued interest, which is $1,500 x 2 (since the interest payments are semi-annual) = $3,000.

Therefore, the correct answer is A) Interest Expense and credit Interest Payable for $3,000.