On December 1, Miller Company borrowed $300,000, at 8% annual interest, from the Nomo Bank. Miller has 60 days before the first payment is required. What is the adjusting entry that Miller would need to make on December 31, the calendar year-end?

A) Debit Interest Payable, $2,000; credit Interest Expense, $2,000.
B) Debit Interest Expense, $2,000; credit Interest Payable, $2,000.
C) Debit Interest Expense, $2,000; credit Cash, $2,000.
D) Debit Interest Expense, $4,000; credit Interest Payable, $4,000.
E) Debit Interest Expense, $24,000; credit Interest Payable, $24,000.

Question

Rizwan Visal · Accepted Answer

Final Answer : B, Explanation :  The adjusting entry for accrual of interest payable at the end of the year can be calculated as follows:Interest expense = (Principal amount × Interest rate × Time)/ 365= ($300,000 × 8% × 31)/365= $6,479Since the loan was taken on December 1, Miller Company would have already used 31 days, and hence the remaining days to be considered for the interest calculation is 29 (60 - 31). Therefore, the interest expense for the month of December would be $2,153 ($6,479 × 29/31) which needs to be accrued at the end of the year.The adjusting entry on December 31 would be as follows:Debit: Interest Expense $2,153Credit: Interest Payable $2,153Hence, the correct choice is B.

Definitions

Learning Objectives

Learning Objectives

Related questions