Question

Mama's Pizza Shoppe borrowed $8,000 at 9% interest on May 1, 2018, with principal and interest due on October 31, 2019. The company's fiscal year ends June 30, 2018. What adjusting entry is necessary on June 30, 2018?

Answer 1

Answer:

Explanation:

First, we have to compute the accrued interest amount, then only the adjustment entry would be made.

So,

Accrued interest = (Borrowed amount) × (rate of interest) × (number of months ÷ total number of months in a year)

= $8,000 × 12% × 2 ÷ 12

= $160

The two months is calculated from May 1, 2018 to June 30, 2018

Now, we pass the adjustment entry which is shown below:

Accrued interest expenses A/C Dr

   To Interest payable

(Being adjustment entry of accrued interest is recorded)