Question

On December 1, Milton Company borrowed $410,000, at 9% annual interest, from the Tennessee National Bank. Interest is paid when the loan matures one year from the issue date. What is the adjusting entry for accruing interest that Milton would need to make on December 31, the calendar year-end?
A. debit Interest Expense, $6150; credit Interest Payable, $6150.
B. debit Interest Expense, $36,900; credit Interest Payable, $36,900.
C. debit Interest Payable, $3075; credit Interest Expense, $3075.
D. debit Interest Expense, $3075; credit Interest Payable, $3075.
E. debit Interest Expense, $3075; credit Cash, $3075.

Answer 1

Answer:

D. debit Interest Expense, $3075; credit Interest Payable, $3075.

Explanation:

Interest expense A/c Dr $3,075

             To Interest payable A/c $3,075

(Being accrued interest adjusted)

The computation of the interest expense is shown below:

= Borrowed amount × rate of interest × (number of months ÷ total number of months in a year)

= $410,000 × 9% × (1 months ÷ 12 months)

= $3,075

The one month is calculated from December 1 to December 31