Kekich & Associates borrowed $6,000 on 1 April 20X2 at 8% interest with both principal and interest due on 31 March, 20X3.

Suppose Kekich & Associates makes adjustment to their accounting accounts at end of each calendar month, which of the following journal entries should the firm use to record the payment of interest on 31 March 20X3?

Question

Kekich & Associates borrowed $6,000 on 1 April 20X2 at 8% interest with both principal and interest due on 31 March, 20X3.

Suppose Kekich & Associates makes adjustment to their accounting accounts at end of each calendar month, which of the following journal entries should the firm use to record the payment of interest on 31 March 20X3?

BlackTom AI · Accepted Answer

Question restatement: Kekich & Associates borrowed $6,000 on 1 April 20X2 at 8% interest, with principal and interest due on 31 March 20X3. The scenario mentions monthly accounting adjustments, and asks which journal entry should be used to record the payment of interest on 31 March 20X3.

Option analysis:
- Provided option: Dr Interest payable 480 Cr Cash 480
  This entry reflects paying off the accrued interest payable by reducing cash and eliminating the liability. The annual interest on $6,000 at 8% is 6,000 × 0.08 = 480. Since interest is accrued monthly, by 31 March 20X3 the entity would have recorded an accrued interest liability (Interest Payable) for the period, and paying it at that date requires debiting Interest Payable to remove the liability and crediting Cash to reflect cash outflow. Therefore, this entry correctly records the payment of the accumulated interest.

Why the other possibilities (if they existed) would be incorrect:
- A typical alternative entry for recording interest payment without prior accrual would be Dr Interest Expense 480 Cr Cash 480, but that would be inappropriate here because the monthly adjustments imply that interest has already been accrued in prior periods as a liability (Interest Payable). Debiting Interest Expense at the payment date would double-count the expense if it had already been recognized through accruals.
- Another common incorrect form would be Dr Interest Expense 480 Dr Interest Payable 480 Cr Cash 960, which is incorrect numerically (it doubles the interest) and records two debits against expenses/liabilities, misrepresenting the actual cash outflow and liability settlement.

Key reasoning summary: The correct approach is to reduce the existing Interest Payable liability by the amount of interest paid, and to decrease Cash accordingly. Since the annual interest on the loan is 480, the standard journal entry upon payment is Dr Interest payable 480 Cr Cash 480, aligning with accrual-basis accounting and the timing of the payment.

BUSMGT 713 Quiz 5.1

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