Question

In September of Year 1, Hansen Company issued a note payable to borrow money from its bank. Principal and interest on the note would come due in June Year 2. Interest expense on this note must be accrued at the end of Year 1 for the period from issuance of the note to the last day of the accounting period.
a. True
b. False

Answer 1

Answer: True

Explanation:

As a result of the Accrual principle in accounting, transactions need to be recorded in the period that they occur in and not in the period they are paid for in.

The interest in Year 1 was incurred in year 1 and so will need to be recorded in year 1 for the period from issuance of the note to the last day of the accounting period.

This means that if the last day of the accounting period is December 31st, the interest for year 1 would have to be accrued from September to December of year 1 and recorded as year 1 interest.