Question

Phipps Company borrowed $25,000 cash on October 1, 2016, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. Assuming that adjusting entries have not been made during the year, the amount of accrued interest payable to be reported on the December 31, 2016 balance sheet is which of the following? a) $250 b) $300 c) $500 d) $750

Answer 1

Answer:

The correct option is C,$500

Explanation:

The amount of interest accrual is the interest on the sum borrowed from October 1 2016 to 31 December 2016,that is 3 months of interest,which is computed below:

Accrued interest =principal*stated interest rate*number of accrued months/12

principal is $25,000

stated interest is 8%

number of accrued months is 3

accrued interest =$25,000*8%*3/12=$500

The accrued interest is to be debited interest expense  because it is an increase in expense  and credited to interest payable as a liability