Q8 Kekich & Associates borrowed $6,000 on 1 April 20X2 at 8% interest with both principal and interest due on March 31, 20X3.

Which of the following journal entries should the firm use to record the interest incurred by 30 April 20X2?

Question

Q8 Kekich & Associates borrowed $6,000 on 1 April 20X2 at 8% interest with both principal and interest due on March 31, 20X3.

Which of the following journal entries should the firm use to record the interest incurred by 30 April 20X2?

BlackTom AI · Accepted Answer

To determine the correct journal entry for interest incurred by 30 April 20X2, we first identify the key terms of the borrowing: principal = 6,000, annual interest rate = 8%, and the interest period from 1 April 20X2 to 30 April 20X2 is one month.

Next, calculate the interest for one month: annual interest = 6,000 × 8% = 480 per year. Monthly interest = 480 ÷ 12 = 40.

Since only one month has elapsed by 30 April 20X2, interest incurred equals 40. In accrual accounting, we recognize the expense incurred and establish a liability for the amount owed but not yet paid.

The appropriate entry to record accrued interest would be:
- Debit Interest expense for 40 to recognize the cost of borrowing for April.
- Credit Interest payable for 40 to record the obligation to pay this interest in the future.

Therefore, the journal entry would be: Dr Interest expense 40; Cr Interest payable 40.

If there were other options, we would compare them against the same principle: correct accrual of one month’s interest, matching the expense with the period incurred, and recognizing a liability for the amount to be paid. Any option that fails to reflect one month’s accrual (40) or misclassifies the account (for example, debiting an asset or crediting cash before payment) would be incorrect.

Additionally, ensure consistency with the accrual basis: the interest expense is recognized even though cash has not yet been paid, hence the creation of a payable rather than an immediate cash outflow.

In summary, the calculation yields 40 for one month, and the corresponding accrual entry is the debit to Interest expense and the credit to Interest payable for 40.

Q8 Kekich & Associates borrowed $6,000 on 1 April 20X2 at 8% interest with both principal and interest due on March 31, 20X3. Which of the following journal entries should the firm use to record the interest incurred by 30 April 20X2?Single choice

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