On March 1, 20X1, your calendar year company borrows $10,000. Terms require repa

Question

On March 1, 20X1, your calendar year company borrows $10,000. Terms require repayment of principal and annual interest of 9% after 4 years. At year-end 20X1, an adjusting entry accrues $550 interest expense. If you discover the error before the books are closed, what is the correcting entry? debit Interest Payable for $350; credit Interest Expense for $350 debit Interest Payable for $550; credit Interest Expense for $550 debit Interest Expense for $350; credit Interest Payable for $350 debit Interest Expense for $550; credit Interest Payable for $550 debit Interest Expense for $200; credit Interest Payable for $200 debit Interest Payable for $200; credit Interest Expense for $200

Explanation / Answer

Amount of interest from March 1, 20X1 to December 31, 20X1 that is 10 months

= Principal x Rate x Time / 12 months

= $10,000 x 9% x 10 / 12

= $750

So, the adjusting entry on December 31, 20X1 should have been

Interest Expense    $750

    Interest payable     $750

(Being Interest expenses recognized for 10 months)

But the actual entry has been made for only $550. So, to rectify it, an additional entry for $200 ($750 - $550) is required to be made

So, as per above discussion, second last option (debit Interest Expense for $200; credit Interest Payable for $200) is the correct option

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