At December 31,Year 1,the adjusting entry with respect to this note includes a:
A)Credit to Interest Payable for $1,600.
B)Credit to Notes Payable for $1,600.
C)Debit to Interest Expense for $3,200.
D)Credit to Cash for $3,200.

Question

Quizplus · Accepted Answer

The adjusting entry for the note would involve recognizing the interest that has accrued but not yet been paid. The amount of interest that has accrued can be calculated as follows: 
$20,000 x 8% x (12/12) = $1,600
This represents the amount of interest expense that needs to be recognized, and it should be recorded with a credit to Interest Payable (liability account) and a debit to Interest Expense (income statement account). Therefore, option A is correct. Option B is incorrect because no payments are being made on the note in this transaction, only interest is being accrued. Option C is incorrect because the interest expense to be recognized is only $1,600, not $3,200. Option D is incorrect because there is no cash transaction occurring in this adjustment.

At December 31,Year 1,the Adjusting Entry with Respect to This