Question

On August 1, Year 1 Gomez Company borrowed $48,000 cash. The one-year note carried a 5% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will effect Gomez’s ledger accounts?
A) Interest payable (2400), Retained earnings (2400).B) Cash (2400), Retained earnings (2400).C) Interest payable (1400), Retained earnings (1400).D) Interest payable +1000, Retained earnings (1000).

Answer 1

Answer:

D) Interest payable +1000, Retained earnings (1000).

Explanation:

Interest expense = 48000*5%*5/12

                            = 1000

Interest expense effect retained earning decrease = -1000

Interest payable increase = 1000

Therefore, The December 31, Year 1 recognition of accrued interest will effect Gomez’s ledger accounts in a way that Interest payable +1000, Retained earnings (1000).