On December 21, a company borrowed $100,000 from its bank. The loan has an annua
ID: 2386289 • Letter: O
Question
On December 21, a company borrowed $100,000 from its bank. The loan has an annual interest rate of 10%. The first payment on the loam will be due on January 21. The company's accounting year ends on December 31.Q1. The December 31 adjusting entry will include a debit to interest _______________.
Q2. The December 31 adjusting entry will include a credit to interest _______________.
Q3. The amount of the December 31 adjusting entry is $__________.
Q4. If the December 31 adjusting entry is not made, will the company's net income be too high or too low?
Q5. If the December 31 adjusting entry is not made, will the amount of the company's liabilities reported on the balance sheet be too low, or okay?
Q6. Is the type of adjusting entry in questions 1 through 5 accrual or deferral?
Explanation / Answer
They borrowed on December 21, and we are dealing with the books on December 31, so that is 10 days. We want to figure out the interest expense we accrued during this 10 day period. To do this we calculate Principal X Interest Rate X ( Number of Days / Number of Days in Year ) $100,000 X 10% X (10 Days / 365 Days ) Some books might use 360 instead of 365 days. $100,000 X 0.1 X (10 / 365) = $273.97 This is the interest expense for this 10 day period. So the adjusting entry would be Interest Expense Debit $273.97 Interest Payable Credit $273.97 Q1: Interest Expense Q2: Interest Payable Q3: $273.97 Q4: If the adjusting entry is not made, we do not record this expense we have. So this means net income will be too high, since all expenses we have are not considered. Q5: If the adjusting entry is not made, we do not record the liability we have to pay the expense. So this means liabilities will be too low on the balance sheet. Q6: This is an accrual. An accrual is basically the following: Nothing has been entered in the accounting records for certain expenses and/or revenues, but those expenses and/or revenues did occur and must be included in the current period's income statement and balance sheet.
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