Question

Revenues have what effect on the accounting equation? Allen Inc. took out a one-year, 8%, $100,000 loan on March 31, 2021. Interest is due upon maturity of the loan. What adjusting entry, if any, should Allen Inc. record on December 31, 2021? Issuing common stock for $5,000 cash is recorded as:

Answer 1

Answer:

See explanation section

Explanation:

1. Journal entry to record the interest due on December 31, 3021 is as follows:

Debit   Interest Expense           $6,000 (Note - 1)                    

Credit   Interest Payable                          $6,000

As interest expense incurs but not paid during the year, a liability will increase. The liability is an interest payable.

Note - 1: Interest expense calculation = Loan × Interest rate × (Number of months due ÷ 12)

Interest expense = $100,000 × 8% × (9 ÷ 12)

Interest expense = $6,000

April 1, 2021 - December 31, 2021 = 9 months.

2. Issuing stock for cash journal entry -

Debit  Cash           $5,000

Credit  Common stock      $5,000