Lauren Hall University borrowed $20,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements and uses months rather than days to calculate interest, the adjusting entry that the company should make for interest on September 30, would be

Question

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Since the note is a 3-month note, the interest is calculated as 6% divided by 12 months times 3 months, which is 1.5%. Therefore, the interest expense for September is $20,000 x 1.5% = $300.

Since the company prepares monthly financial statements and uses months rather than days to calculate interest, the interest that has accrued from September 1 to September 30 is $300 divided by 3 months multiplied by 1 month, which is $100.

The adjusting entry for September 30 would be:

Debit Interest Expense, $100
Credit Interest Payable, $100

This entry records the interest that has accrued for the month of September but has not yet been paid.

Lauren Hall University Borrowed $20,000 from the Bank Signing a 6