Question

On February 1 of Year 1, the company received $100,000 cash from a one-year bank loan. The interest rate on the loan is 8%. No payments are due on the loan until January 31 of Year 2. Which ONE of the following would be included in the ADJUSTING journal entry necessary on December 31 with respect to this loan?

Group of answer choices

DEBIT to Cash for $7,333

CREDIT to Interest Payable for $8,000

CREDIT to Cash for $7,333

DEBIT to Interest Expense for $7,333

DEBIT to Interest Payable for $7,333

CREDIT to Interest Expense for $8,000

Answer 1

Date of Note issued = Feb 1

Par value of note = $100,000

Interest rate = 8%

Time period upto Dec 31, year 1 = 11 months

Interest expense to be recorded on Dec 31, year 1 = Par value of note x Interest rate x Time period

= 100,000 x 8% x 11/12

= $7,333

On dec 31, year 1 the following adjusting entry would be made :

Journal

Date	Account Title and Explanation	Debit	Credit
Dec 31	Interest expense	7,333
	Interest payable		7,333
	(To record interest expense )

Fourth option is the correct option