Question

Herrindale Mart borrows $420,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each subsequent quarter.

What will Herrindale Mart need to accrue on August 31, assuming that no accrual has yet been made?

A) $21,000; Decrease liabilities and decrease cash

B) $7,000; Decrease liabilities, decrease cash

C) $3,500; Increase liabilities, increase expenses

D) $7,000; Increase liabilities, decrease retained earnings

Answer 1

Answer : C) $3,500; Increase liabilities, increase expenses

As

Interest for two months = $420000 x 5% x 2/12 = $3500

as interest is not paid so following entry will be passed

Date	Accounts	Debit	Credit
August 31	Interest Expense	$    3,500
	Accrued Interest		$    3,500
	(To record interest expense for two months)

Which will increase the liability and expense by $3500  

Hit Thumbs up if satisfied

Have any query mention in comment section please

Thank you