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25 November, 07:17

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

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  1. 25 November, 11:08
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    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.
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