Question

On October 1, 2018, Perry Corporation signed a 12-month, 8% interest-bearing promissory note for $10,000. Assume that all appropriate adjusting journal entries were made at 12/31. The journal entry required when the note matures on October 1, 2019 would include a debit to interest expense for

Answer 1

Answer:

$600

Explanation:

The reason is that the recognition of the interest expense is split between two accounting periods. In the first accounting period the interest expense recognized will be for 3 months as the period from inception (October 1, 2018) to the end of year (December 31, 2018) is 3 months.

This means that:

Interest Expense = $10,000 * 8% * 3/12 = $200

So this will be recognized in the first accounting period ending at December 31, 2018. The interest expense of 9 months falls in the secong accounting period, which means the interest expense for the second accounting period will be:

Interest Expense = $10,000 * 8% * 9/12 = $600