Question

On November 1, 2018, Sky Mountain Co. borrowed $200,000 cash on a 1-year, 6% note payable that requires Sky Mountain to pay both principal and interest on October 31, 2019. Given no prior adjusting entries have been recorded, the adjusting journal entry on December 31, 2018, Sky Mountain's year-end, would include a:

Multiple Choice

credit to Cash of $2,000.

debit to Interest Expense of $12,000.

credit to Interest Payable of $2,000.

credit to Note Payable of $2,000.

Answer 1

• Notes Payable issued on 1 Nov 2018 for $ 200,000
• Hence, Interest will be accrued as ‘payable’ for 2 months till 31 Dec 2018 [1 Nov to 31 Dec]
• Interest for 2 months = 200000 x 6% x 2/12 = $ 2,000
• Complete entry to record the Interest expense for $ 2,000 will be:

Date	Accounts title	Debit	Credit
31-Dec-18	Interest Expense	$                         2,000
	Interest payable		$             2,000

• Hence, Correct Answer = Option #3: Credit to Interest Payable of $ 2,000