Fallon Company issued a $20,000 note to the Capital Bank on August 1, 2013. The note carried a one-year term and a 12% rate of interest. The adjusting entry on Fallon's books to record accrued interest expense on December 31, 2013 will

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$20,000 principle x 12% x 5 months/12 months = $1,000 interest expense. The accrual will increase liabilities (interest payable) and increase expenses, which will decrease net income and equity.

Fallon Company Issued a $20,000 Note to the Capital Bank