Question

Blue Guitar Music School borrowed $30,000 from the bank signing an 8%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note?a. debit Interest Expense, $1,800; credit Interest Payable, $1,800.
b. debit Interest Expense, $150; credit Interest Payable, $150.
c. debit Note Payable, $1,800; credit Cash, $1,800.
d. debit Cash, $450; credit Interest Payable, $450.

Answer 1

Answer:

b. debit Interest Expense, $200; credit Interest Payable, $200.

Explanation:

Journal entry to record the adjusting entry for November 30 for the interest-only as principal and interest will be paid on May 1.

November 30 Interest expense Debit $200 (note 1)

Interest Payable Credit $200

Note 1: Interest expense for one month = $30,000 × 8% × (1 ÷ 12) = $200

Since interest expense has not been paid and incurred only for one month, a liability account, i.e., interest payable, will arise.