Question

Universal Travel, Inc. borrowed $502,000 on November 1, 2021, and signed a twelve-month note bearing interest at 6%. Principal and interest are payable in full at maturity on October 31, 2022. In connection with this note, Universal Travel, Inc. should report interest payable at December 31, 2021, in the amount of: (Do not round your intermediate calculations.) Multiple Choice $30,120. $7,530. $25,100. $5,020.

Answer 1

Answer: Interest = $5,020

Explanation:

Interest  is given as Principal x Rate   X Time

= $502,000  x 6% x 2/ 12 ( Because of the duration from November 1st to December 31st  )

=$5,020

And would be recorded in the journal entry

Date                   Accounts and explanation             Debit               Credit

Dec 31st, 2021      Interest Expense                        $5,020

               Interest Payable                                                                   $5,020  

Answer 2

Answer:

Interest payable to be reported on 31 December 2021 will be $5020

Explanation:

Following the accrual principle of accounting, we record transactions on the basis of matching the revenues and expenses and recording them in the particular period to which they relate to and occur rather than in the period when cash is received or paid. We will make an adjusting entry on 31 December to record the interest expense and interest payable that relate to year 2021.

Interest expense 2021 = 502000 * 0.06 * 2/12 = $5020

The entry on 31 December 2021 will be,

Interest expense     5020 Dr

     Interest Payable       5020 Cr