Question

On January 1, Bloomingdale, Inc. borrows $92,000 from First Estate Bank. The loan is due in one year along with 4% interest. The company is preparing its quarterly report for March 31. Which of the following best describes the necessary accrual for interest expense? A. $3,680 increase expenses, decrease cash B. $ 920 increase liabilities, increase expenses C. $3,680 increase liabilities, decrease expenses D. $3,680 decrease liabilities, decrease cash E. $ 920 decrease liabilities, decrease cash

Answer 1

Answer:

B. $ 920 increase liabilities, increase expenses

Explanation:

The interest expense for the entire duration of the loan (1 year) may be determined as the product of the interest rate percentage on the principal amount borrowed.

As such, interest for the duration of the loan

= 4% * $92,000

= $3680

As at the end of the first quarter (March 31), amount of expense to be accrued

= 1/4 * $3680

= $920

To account for this,

Debit Interest expense $920

Credit Accrued Interest $920

Hence Expense increase as well as liability in form of accrued expense.