Phipps Company borrowed $16,000 cash on October 1, 2014, and signed a six-month, 6% interest-bearing note payable with interest payable at maturity. Assuming that adjusting entries have not been made during the year, the amount of accrued interest payable to be reported on the December 31, 2014 balance sheet is which of the following? a $240. b $360. c $120. d $480.

The accrued interest payable to be reported on December 31, 2014 will be $240 and option a is the correct answer.

Explanation:

The interest rate given on the notes payable is the annual rate. Following the accrual basis of accounting, the revenues and expenses for a period should be matched and recorded in their respective periods. Thus, the interest relating to the period from October to December will be recorded as an expense on 31 December 2014 and debited to interest expense and credited to interest payable as the interest will be paid at maturity.

The interest expense for the 3 month period from October to December is,

Interest expense = 16000 * 0.06 * 3/12 = $240

The entry will be,

31 Dec 2014 Interest expense $240 Dr

Interest Payable $240 Cr

The amount of accrued interest payable to be reported on the December 31, 2014 balance sheet is a $240

Explanation:

Phipps Company borrowed $16,000, 6% interest rate.

The amount of the interest per year = 6% x $16,000 = $960

The amount of the interest per month = $960/12 = $80

On December 31, 2014, following 3 months borrowing, the amount Interest expense Phipps Company records:

$80 x 3 = $240

The adjusting entry:

Debit Interest expense $240

Credit Interest Payable $240