A business makes a loan payment on the 15^th of each month. At the end of December, it has accrued 16 days worth of interest on the loan, which amounts to $450. The adjusting entry necessary at the end of the fiscal period ending December 31 would be recorded as a A) debit to Interest Payable and a credit to Interest Expense of $450 B) debit to Prepaid Interest and a credit to Interest Expense of $450 C) debit to Interest Expense and a credit to Interest Payable of $450 D) debit to Interest Expense and a credit to Prepaid Interest of $450

Question

Quizplus · Accepted Answer

The adjusting entry necessary at the end of the fiscal period ending December 31 would be to record the interest expense that has been incurred but not yet paid. This means that the business owes the interest amount to the lender, so it would be recorded as a debit to Interest Expense (an income statement account) and a credit to Interest Payable (a liability account). Since the interest accrued is $450, the correct entry would be a debit to Interest Expense for $450 and a credit to Interest Payable for $450. Option C is the only option that matches this description. The other options involve recording the interest payment as either prepaid or already paid, which is not accurate.

A Business Makes a Loan Payment on the 15th of Each

A Business Makes a Loan Payment on the 15^th of Each