Question

Tate Company purchased equipment on November 1, 2020 and gave a 3-month, 9% note with a face value of $120,000. Tate’s year-end is December 31st. The December 31, 2020 adjusting entry is Group of answer choices debit Interest Expense and credit Cash, $7,200 debit Interest Expense and credit Interest Payable, $1,800 debit Interest Expense and credit Interest Payable, $1,200 debit Interest Expense and credit Interest Payable, $10,800

Answer 1

Answer: Debit Interest Expense and credit Interest Payable, $1,800

Explanation:

The amount of time that has elapsed between the 1st of November and the 31st of December is 2 months.

This means that the interest over the last 2 months has to be calculated and recorded on the 31st of December.

Bear in mind that the 9% is an annual interest rate figure and so when calculating the interest, you must adjust for the amount of months in the year.

Interest owed for 2 months is,

= 9% * 2/12 (2 months have elapses out of 12 months in the year) * $120,000

= $1,800

Interest owed is $1,800.

The correct entry will therefore be,

Dec 31

DR Interest Expense $1,800

CR Interest Payable $1,800

( To record interest payable on note)