Question

The Pita Pit borrowed $100,000 on November 1, 2021, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2022. In connection with this note, The Pita Pit should report interest expense at December 31, 2021, in the amount of: (Do not round your intermediate calculations.)

Answer 1

Answer:

December 31 2021  Interest expense           $2000 Dr

                                     Interest Payable             $2000 Cr

Explanation:

The interest on note payable is an expense. Assuming that the year end adjusting entries are made on 31 December, we will accrue the interest on note that relates to this year i.e. 2021 following the accrual basis of accounting. The interest that relates to 2 months of 2021 i.e. November and December will be:

Interest expense = 100000 * 0.12 * 2/12 = $2000

The interest will be recorded as interest expense and the interest expense account will be debited. As the interest is due but will be paid on maturity, we will credit interest payable account by the amount of interest due.