Question

On september 1, kennedy company loaned $100,000, at 12% annual interest, to a customer. interest and principal will be collected when the loan matures one year from the issue date. assuming adjustments are only made at year-end, what is the adjusting entry for accruing interest that kennedy would need to make on december 31, the calendar year-end?

Answer 1

The adjusting entry on December 31 will be
Debit - Interest expense     4,000
Credit -     Interest payable      4,000

Interest = Amount x annual interest x time
Interest = 100,000 x 12% x (4 / 12)
Interest = 4,000

Note: The time is from September 1 to December 31 which would equal to 4 months then over 12 months.