On June 1, 2019, Mighty Fast Flooring issued a 10-month, 9 percent note for $5,000. The note was recorded in the Notes Payable-Trade account. The adjusting entry on December 31 to record the interest accrued (owed)on the note is:

Question

Quizplus · Accepted Answer

The interest accrued on the note can be calculated as:

Interest = Principal x Rate x Time
Interest = $5,000 x 0.09 x (7/12)
Interest = $262.50

Therefore, the adjusting entry on December 31 will be:

Debit Interest Expense for $262.50 and Credit Interest Payable for $262.50 to record the interest owed but not yet paid.

Option A is incorrect because the interest accrued is $262.50, not $450.

Option C is incorrect because the company issued the note and owes interest to the holder, thus it cannot record interest income.

Option D is incorrect because it does not account for the accrued interest in the Interest Payable account, which will have to be paid in the future.

On June 1, 2019, Mighty Fast Flooring Issued a 10-Month