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15 February, 09:15

On July 1, Orcas Lab issued a $100,000, 12%, 8-month note. Interest is payable at maturity. What is the amount of interest expense that should be recorded in a year-end adjusting entry if the fiscal year-end is (a) December 31? (b) September 30?

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  1. 15 February, 13:02
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    interest expense 6,000 debit

    interest payable 6,000 credit

    Explanation:

    we need to recognize the interest accrued for the perdion

    July 1st to December 31th = 6 months

    100,000 x 12% x 6/12 = 6,000

    Notice the 12% is an annual rate, the year has 12 months and we want to calculate for 6 months, so 12% x 6/12 will be the equivalent rate for the period we need.

    the journal entry would be:

    interest expense 6,000 debit

    interest payable 6,000 credit

    We need to:

    recognize the interest expense for the current year and declare that we owe this amount of interest.
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