On November 1,2012,New Morning Bakery signed a $200,000,6%,six-month note payable with the amount borrowed plus accrued interest due six months later on May 1,2013.New Morning Bakery should record which of the following adjusting entries at December 31,2012?

Question

Quizplus · Accepted Answer

The adjusting entry to be recorded at December 31, 2012, should reflect the interest expense that has been incurred on the note payable during the two months from November 1 to December 31.

The total interest expense on the note payable is $200,000 x 6% x 6/12 = $6,000, which is the amount that New Morning Bakery will have to pay at maturity on May 1, 2013.

However, for the period from November 1 to December 31, only 2 out of the 6 months have elapsed, so the interest expense for this period is $6,000 x 2/6 = $2,000.

Therefore, the adjusting entry should be Debit Interest Expense $2,000 and Credit Interest Payable $2,000.

On November 1,2012,New Morning Bakery Signed a $200,000,6%,six-Month Note Payable