Question

7. Elizabeth Barrett owns and manages Kinelee's Irish Pub. Elizabeth prepares her operation's financial statements using accrual accounting and a calendar year. On December 1 of the current year Elizabeth borrowed, by signing a six-month personal note, $50,000 from her local bank to purchase new dispensing systems that will allow her to expand the number of draft beer she can serve. Annual interest on the note is 12%. No principal repayment or interest payments are due on the note until May 31 of next year, at which time all of the principal and interest are due. On December 31 of this year Elizabeth prepares her year-end income statement and balance sheet. Answer the following questions that relate to the December 31 adjusting entries she must make to her interest expense and interest payable accounts to properly record the impact of this loan on her year-end financial statements. Kinelee's Irish Pub Year-End Adjusting Entry (a) What is the amount of the adjusting accounting entry that Elizabeth must make? (b) What is the name of the account that must be debited? (c) What is the name of the account that must be credited? (d) On which financial statement will the account to be debited be found? (e) On which financial statement will the account to be credited be found? (f) What would be the impact on the interest expense account if this adjusting entry is not completed? (g) What would be the impact on net income if this adjusting entry is not completed? (h) What would be the impact on owners' equity if this adjusting entry is not completed? (i) What would be the impact on the interest payable account if this adjusting entry is not completed?

Answer 1

Kinlee's Irish Pub Year-End Adjusting Entry
(a)	$50,000 × 12% × 1/12 = $500
(b)	Interest expense
(c)	Interest payable
(d)	Income statement under expense as interest expense
(e)	Balance Sheet under liabilities
(f)	Understated
(g)	Overstated
(h)	Overstated
(i)	Understated