On October 1,2015,United Co.negotiates with its bank to borrow $10,000 cash on a one-year note.The bank charges 5% interest.Interest payments are to be made in two installments,on March 31 and September 30.The principal is to be repaid on September 30,2016,the maturity date.What adjusting entry needs to be recorded of December 31,2015?
A) Debit Interest Expense and credit Interest Payable for $250
B) Debit Interest Expense and credit Interest Payable for $125
C) Debit Interest Expense and credit Interest Payable for $500
D) Debit Interest Payable and credit Interest Expense for $500

Question

Quizplus · Accepted Answer

The interest for the period from October 1 to December 31, 2015, is calculated as $10,000 * 5% * (3/12) = $125. Therefore, the adjusting entry would be to debit Interest Expense and credit Interest Payable for $125.