Question

On december 1, milton company borrowed $480,000, at 8% annual interest, from the tennessee national bank. interest is paid when the loan matures one year from the issue date. what is the adjusting entry for accruing interest that milton would need to make on december 31, the calendar year-end?

Answer 1

Answer:

Debit Interest Expense - $ 3,261.37

Credit Interest payable - $ 3,261.37

Explanation:

Amount borrowed by the company -   $ 480,000

Annual Interest rate - 8 %

Accrued interest at the end of year i.e. December 31 - ?

Consider one year = 365 days

Annual Interest rate = 8 %

Interest rate per day=  8% / 365 = 0.0002192 %

Per day Interest amount = Interest rate per day x Principal amount

Per day Interest amount = .0002192 x $ 480,000

Per day Interest amount = $ 105.2055

Total days from 1st December to 31st December (Both dates Inclusive) = 31

Interest amount for 31 days = 31 days x Per day interest amount

Interest amount for 31 days = $ 3,261.37.

Thus Adjusting entry for accrued interest ;

Account Head                               Dr                                Cr

Interest Expense                          $ 3,261.37

Interest Payable                                                                $ 3,261.37

Answer 2

Debit Interest Expense [$480,000 x 8% x 360/360] = $38,400.00
Credit Interest Payable = $38,400.00