Question

We borrowed $10,000 from the bank in late October. As of December 31 we owe the bank $200 of interest that we will pay when we pay off the principal amount on January 7. By January 7 we end up owing another $50 of interest; on that date, we pay the bank the entire amount we owe. Give the adjusting entry at December 31 to account for the interest that we owe.

Answer 1

The adjusting entry for interest owed as of December 31 is to debit Interest Expense for $200 and credit Interest Payable for $200. This reflects the cost incurred during the current period and the forthcoming liability to be paid.

Step-by-step explanation:

The adjusting entry for the interest owed on December 31 in response to borrowing $10,000 would involve recording the interest as an expense and a liability. Since the interest will not be paid until January 7 but was incurred by December 31, it is an accrued interest expense and has to be recognized on the December 31 financial statements.

Entry for Accrued Interest:

Debit Interest Expense $200

Credit Interest Payable $200

This entry increases the expense on the income statement for the current year and also increases the liabilities on the balance sheet, reflecting the obligation to pay the bank.