Castle financed the purchase of a delivery truck by borrowing cash from E-Z Cred

Question

Castle financed the purchase of a delivery truck by borrowing cash from E-Z Credit on January 1. The annual interest on this loan is $750 payable on January 1 of each year. What is the adjusting entry to accrue interest on December 31 at fiscal year end?

A) debit Interest Expense $750; credit Interest Payable $750

B) debit Interest Income $750, credit Interest Payable $750

C) debit Interest Expense $750; credit Cash $750

D) debit Interest Payable $750; credit Interest Expense $750

PLEASE EXPLAIN IN DETAIL, THANKS IN ADVANCE!

Explanation / Answer

A)  DEBIT INTEREST EXPENSE $750 ; CREDIT INTEREST PAYABLE $750 Interest expense(nominal ac) is an income statement account which is used to report the amount of interest incurred on debt during a period of time.

Interest payable (real ac)is a current liability account that is used to report the amount of interest that has been incurred but has not yet been paid as of the date of the balance sheet.

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