Question

On July 1, Alaskan Adventures issues a $120,000, eight-month, 6.5% note. Interest is payable at maturity. What is the amount of interest expense that the company would record in a year-end adjustment on December 31

Answer 1

Answer:

December 31  Interest expense       $3900 Dr

                           Interest Payable            $3900 Cr

Explanation:

The interest and principal is both payable at maturity thus we need to accrue the interest payment and create a liability against the amount of interest due. The adjustment is made 6 months from the issue of the note thus the interest for 6 months is due. The entry would be to record 6 month's interest that relates to this year. The interest expense will be,

120000 * 0.065 * 6/12 = $3900

As the payment is not made until maturity we will credit interest payable by this amount.