Indirect Personnel,Inc.obtained a $20,000 note payable on August 1,2012,that is due in 5 years.Interest,at an annual rate of 12%,will be paid once a year on July 31.The accountant made the appropriate journal entry on August 1,2012.No other journal entry has been made.What journal entry is necessary as of December 31,2012?
A)Debit Interest Expense and credit Notes Payable for $1,000
B)Debit Interest Expense and credit Notes Payable for $2,400
C)Debit Interest Expense and credit Interest Payable for $1,000
D)Debit Interest Expense and credit Interest Payable for $2,400
E)Debit Interest Expense and credit Interest Receivable for $2,400

Question

Quizplus · Accepted Answer

From August 1st to December 31st, there are 5 months of accrued interest (from August to December), which is calculated as follows: 
$20,000 x 12% x 5/12 = $1,000

Since the interest payment date is on July 31st, the interest for the year ended December 31st, 2012 is not yet due or paid. Therefore, the entry is to debit Interest Expense (income statement) and credit Interest Payable (current liability) for the amount of accrued interest, which is $1,000.