Wisconsin Bank lends Local Furniture Company $100,000 on November 1.Local Furniture Company signs a $100,000,8%,4-month note.The fiscal year end of Local Furniture Company is December 31.The journal entry made by Local Furniture Company on December 31 is:

Question

Quizplus · Accepted Answer

The Local Furniture Company has to accrue interest expense for the two months (November and December) that have passed since the note was issued. The interest expense is calculated as $100,000 x 8% x 2/12 = $1,333. Since the fiscal year ends on December 31, the company has to make an adjusting entry to record the interest expense and interest payable. The entry would be to debit Interest Expense for $1,333 and credit Interest Payable for $1,333. This entry recognizes the interest expense that has been incurred but not yet paid and the liability that the company owes to the bank for the interest on the note. Therefore, option A is the correct answer.

Wisconsin Bank Lends Local Furniture Company $100,000 on November 1