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West County Bank agrees to lend Sandhill Co. $508,000 on January 1. Sandhill Co. signs a...

Question:

West County Bank agrees to lend Sandhill Co. $508,000 on January 1. Sandhill Co. signs a $508,000, 6%, 6-month note. What is the adjusting entry required if Sandhill Co. prepares financial statements on March 30?

a.

Interest Expense 7620
Interest Payable 7620

b.

Interest Expense 15240
Interest Payable 15240

c.

Interest Expense 15240
Cash 15240

d.

Interest Payable 7620
Interest Expense 7620

Interest

Interest are additional income or payment related to the use of money of others. Common assets that bears interest are cash, loan receivable and notes receivable.

Answer and Explanation:

Answer : a.

Interest Expense $7,620
Interest Payable $7,620

Interest of 6% imputed on the note is always considered as an annual rate, unless otherwise stated. Therefore interest for the 3-month period (January 1 to March 30) is computed as follows:

Interest = Face Value * Rate * Period

Interest = $508,000 * 6% * 3/12

Interest = $7,620


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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