If the company is preparing financial statements 3 months after this transaction, what is the necessary adjusting entry?
A) Option A
B) Option B
C) Option C
D) Option D

Question

If the company is preparing financial statements 3 months after this transaction, what is the necessary adjusting entry? 
A) Option A 
B) Option B 
C) Option C 
D) Option D

Quizplus · Accepted Answer

The necessary adjusting entry is to recognize the interest expense that has been incurred but not yet recorded. Option A correctly records the interest expense of $250 ($10,000 x 12% x 3/12 months) and reduces the liability of notes payable by the same amount. Option B incorrectly records the interest expense as $300, which is the amount of interest that would be paid if the loan was outstanding for a full year. Option C incorrectly records the interest expense as $200, which is the amount of interest that would be paid if the loan was outstanding for only two months instead of three. Option D does not record any adjusting entry for interest expense.

If the Company Is Preparing Financial Statements 3 Months After