Question

On July 1, Orcas Lab issued a $100,000, 12%, 8-month note. Interest is payable at maturity. What is the amount of interest expense that should be recorded in a year-end adjusting entry if the fiscal year-end is (a) December 31? (b) September 30?

Answer 1

a) 100,000 x 12% x 6/12 = 6,000

b) 100,000 x 12% x 3/12 = 3,000

Answer 2

interest expense 6,000 debit

interest payable 6,000 credit

Step-by-step explanation:

we need to recognize the interest accrued for the perdion

July 1st to December 31th = 6 months

100,000 x 12% x 6/12 = 6,000

Notice the 12% is an annual rate, the year has 12 months and we want to calculate for 6 months, so 12% x 6/12 will be the equivalent rate for the period we need.

the journal entry would be:

interest expense 6,000 debit

interest payable 6,000 credit

We need to:

recognize the interest expense for the current year and declare that we owe this amount of interest.