On November 1,Greenfield Corporation borrowed $55,000 from a bank and signed a 12%,90-day note payable in the amount of $55,000.If you assume 360 days in year,the November 30 adjustment will
A)increase interest expense by $550 and decrease cash by $550.
B)increase discount on notes payable by $1,100 and increase interest payable by $1,100.
C)increase interest expense by $550 and increase interest payable by $550.
D)increase interest expense by $550 and increase notes payable by $550.

Question

Quizplus · Accepted Answer

Since the note was signed on November 1st and has a 90-day term, it will mature on January 30th of the following year. Therefore, on November 30th (30 days after borrowing the money), an adjusting entry is required to accrue interest expense and interest payable for the 30-day period.

The calculation for the interest expense is:

$55,000 x 12% ÷ 360 days x 30 days = $550

This means that the company has accrued $550 of interest over the 30-day period.

The adjusting entry will be:

Interest Expense $550
Interest Payable     $550

This entry will increase the interest expense account by $550, which represents the cost of borrowing money for the 30-day period. It will also increase the interest payable account by $550, which represents the amount of interest owed to the bank at the end of the period.

There is no discount on notes payable or increase in notes payable in this situation. The only effect of the adjusting entry is on interest expense and interest payable accounts.

On November 1,Greenfield Corporation Borrowed $55,000 from a Bank and Signed