Question

On September 1, Sky Mountain Co. borrowed $200,000 on a 6%, 9-month note payable to Coast National Bank. Given no previous adjusting entries have been recorded, Sky Mountain's adjusting entry four months later at December 31 would include a:

Answer 1

Answer:

Accrued Interest - $5,333.33

Explanation:

At the end of the year, due to the matching principle, expenses of the same period need to be matched with that period and 'expensed' in the same year.

In the scenario above there has been 4 months out of 9 used in the current year, hence as at December 31st. 4 months interest will be included in the current year and 5 months interest will be attributable to the following future.

4 months / 9 months * 6% * 200,000 = $5333.33

In consonance with the accrual basis of accounting, the amount of accrued interest that will be recorded with adjusting entries will be:

Dr Interest expense - 5,333.33

Cr    Accrued Interest -   5,333.33