Q15. Accrued expenses
Entity A borrowed $500,000 on December 1, 20×1. Annual interest rate is 12% and interest is payable at the end of every 3 months.
Prepare a journal entry to accrue interest expense for the month of December 20×1 on December 31, 20×1.
A15. Under the accrual basis accounting, expense is recognized as it is incurred even if cash is paid later.
December 31, 20×1
| Debit | Credit | |
| Interest expense | 5,000 | |
| Interest payable | 5,000 |
[Note]
1. Increase in interest expense (expense): debit
2. Increase in interest payable (liability): credit
3. Annual interest expense = $500,000 x 12% = $60,000
4. Interest expense for the month of December 20×1
= Annual interest expense x 1/12
= $60,000 x 1/12 = $5,000
[Exercise]
Entity B borrowed $120,000 on November 1, 20×1. Annual interest rate is 6% and interest is payable at the end of every 6 months. Prepare a journal entry to accrue interest expense for November and December 20×1 on December 31, 20×1.
December 31, 20×1
| Debit | Credit | |
| Interest expense | 1,200 | |
| Interest payable | 1,200 |
[Note]
1. Increase in interest expense (expense): debit
2. Increase in interest payable (liability): credit
3. Annual interest expense = $120,000 x 6% = $7,200
4. Monthly interest expense = annual interest expense x 1/12
= $7,200 x 1/12 = $600
5. Interest expense for November and December 20×1
= $600 x 2 = $1,200