Question

On March 1, the Garner Corporation borrowed $75,000 from the First Bank of Midlothian on a 1-year, 5% note.


Required: If the company keeps its records on a calendar year, what adjusting entry should Garner make on December 31?

Answer 1

Answer:

Debit Interest expenses with $3,125; and Credit interest payable with $31,125.

Explanation:

Total interest on note = $75,000 * 5% = $3,750

Interest for for 10 months March 1 - December 31 = $3,750 * (10/12) = $3,125.

The adjusting entry should Garner make on December 31 will be as follows:

Details                                                 Dr ($)             Cr ($)                              

Interest expenses                              3,125

Interest payable                                                        31,125

To record interest payable on the First Bank of Midlothian note for the year.