Question

Foreman company obtained a $20,000, 6% loan on May 1, 2018. Principal and interest will be paid on April 30, 2019. On December 31, 2018, what adjusting entry would Foreman make related to this loan?

a. Debit Interest Expense: $1,200, credit Interest Payable: $1,200

b. Debit Interest Expense: $1,200, credit Cash: $1,200

c. Debit Interest Expense: $800, credit Cash: $800.

d. Debit interest Expense: $800, credit Interest Payable: $800

e. Debit Interest Expense: $700, credit Interest Payable: $700

Answer 1

Firstly we calculate amount of Interest from May 1,2018 to December 31,2018 (for 8 months):-

​​​​​​Amount of Interest for 8 months=$(20,000×6%×8/12)

=$(20,000×6/100×8/12)

=$800

Adjusting Entry for the Loan is:-

Foreman Company

General Journal (Adjusting Entry)

December 31,2018

Date	Accounts Title and Explanation	Debit	Credit
December 31	Interest Expense	$800
	Interest Payable		$800
	(To record accrued interest on loan )

So the Answer is Option (d) Debit Interest Expense: $800, credit Interest Payable: $800.