Question

The edgartown company borrowed $480,000 on december 1, 2014. the note, which is due in 60 days, included interest at 8%. the company's fiscal year ends on december 31. how would the company record the adjusting entry relating to this note at december 31, 2014?

Answer 1

The total interest due at the end of two months is computed by $480,000 * 0.08 * 2/12 = $6400

As the notes payable charge interest each month interest of $6400/2 = $3200 needs to be accrued. So the adjusting entry to be recorded is:

debit to interest expense 3200
credit to interest payable 3200