Question

On October 1, Lawrence Company borrowed $60,000 from Fourth National Bank on a 1-year, 7% note. If the company's fiscal year ends as of December 31, Lawrence should make an entry to increase a. interest expense, $4,200. b. notes payable, $1,050. c. interest payable, $1,050. d. prepaid interest, $3,150.

Answer 1

Answer:

Lawrence should make an entry to increase c. interest payable, $1,050

Explanation:

The interest amount Lawrence Company had to pay for the note:

$60,000 x 7% = $4,200

In Lawrence's fiscal year ends on December 31, following 3 months of borrowing the $60,000. Following the Accrual basis, the company should make an adjustment entry to record interest expense with amount:

$4,200/12 x 3 = $1,050

The entry:

Debit Interest expense $1,050

Credit Interest payable $1,050