Question

Borrower Company borrowed $100,000 from Bank A on August 1 of Year 1. The annual interest rate on the loan is 12%. Borrower Company will repay the entire loan, both principal and accrued interest, after one year on July 31 of Year 2. So, Borrower Company will pay NO CASH to Bank A between August 1 of Year 1 and July 31 of Year 2.

Which ONE of the following is included in the ADJUSTING ENTRY necessary to record interest expense on the books of Borrower Company on December 31 of Year 1?

Answer 1

Borrowed from bank = $ 100,000

Date of borrowing = August 1 , Year 1

No payment made within August 1 Year 1 to December 31 Year 1 , because one shot repayment made on July 31 , Year 2.

Adjustment entry made on December 31,Year 1 for interest expense as it is due but not paid.

Adjustment entry

Date	Accounts Title and Explanation	Debit	Credit
December 31 , Year 1	Interest Expense [100,000 X 12% X 5/12]	5,000
	Interest Payable /Accrued Interest		5,000
	[Adjustment entry made for accrued interest ]

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In your question no alternatives I found, so I have depicted the whole accounting process for passing adjustment entry for unpaid interest.