Part 1Pegasus Corp. signed a threeminus−month, 77% note on November 1, 2023 for the purchase of $ 280,000$280,000 of inventory. If Pegasus makes adjusting entries only at the end of the year, the entry made at January 31, 2024 will include a ________. (Do not round any intermediary calculations. Round your final answer to the nearest dollar.) Part 1
A. credit to Note Payable for $ 280,000$280,000 B. debit to Interest Expense for $ 3,267$3,267 C. debit to Interest Expense for $ 4,900$4,900 D. debit to Note Payable for $ 280,000$280,000

Question

Part 1Pegasus Corp. signed a threeminus−​month, 77​% note on November​ 1, 2023 for the purchase of $ 280,000$280,000 of inventory. If Pegasus makes adjusting entries only at the end of the​ year, the entry made at January​ 31, 2024 will include a​ ________. (Do not round any intermediary calculations. Round your final answer to the nearest​ dollar.) Part 1
A. credit to Note Payable for $ 280,000$280,000 B. debit to Interest Expense for $ 3,267$3,267 C. debit to Interest Expense for $ 4,900$4,900 D. debit to Note Payable for $ 280,000$280,000

BlackTom AI · Accepted Answer

To tackle this problem, I’ll restate the scenario and evaluate each possible entry at January 31, 2024.

Scenario: Pegasus Corp. signed a three-month, 7% note on November 1, 2023 for $280,000 to finance inventory. At year-end, adjusting entries are made only at the end of the year, which implies calculating interest accrued from November 1, 2023 through December 31, 2023 (and in this case through January 31, 2024 for the next period if the adjustment is made then).

Option A: credit to Note Payable for $280,000. This would imply extinguishing the note liability by paying it off, which is not an adjusting entry for accrued interest. There is no activity that would require reducing the Note Payable balance at January 31, 2024 unless a payment were made, which is not described in the scenario. Therefore, this entry is incorrect as an adjusting entry for accrued interest.

Option B: debit to Interest Expense for $3,267. To assess the amount, compute interest for the period from November 1, 2023 to January 31, 2024 if the adjustment is recorded on January 31. The annual interest is 7% of $280,000, which is $19,600 per year. For three months (November–January), interest would be 19,600 × 3/12 = $4,900. For the period November 1 to December 31 (two months) it would be 19,600 × 2/12 = $3,267 approximately, but note that the standard adjusting entry on January 31 typically covers the full three months up to January 31. If the entry is intended to reflect only the period through December 31, the $3,267 figure corresponds to two months, not three, making this amount inconsistent with a full three-month accrual.

Option C: debit to Interest Expense for $4,900. This matches the full three-month accrual of interest on a $280,000 note at 7% for November 1, 2023 through January 31, 2024 (three months at 7% annual rate: 280,000 × 0.07 × 3/12 = 4,900). An adjusting entry at January 31 typically records Interest Expense for the accrued interest and Interest Payable for the same amount, recognizing the interest expense incurred during the period.

Option D: debit to Note Payable for $280,000. Debiting Note Payable for the full principal amount would imply reclassifying or extinguishing the note, which is not consistent with an accrual of interest. The principal remains outstanding unless the note is paid, so this option does not reflect the proper adjusting entry for interest accrual.

Putting it together, the correct adjusting entry for accrued interest on January 31, 2024 would generally be a debit to Interest Expense for $4,900 and a credit to Interest Payable for $4,900, reflecting the cost of borrowing incurred during the period. Among the given choices, Option C aligns with that calculation for interest accrued over the three-month period. The other options either misstate the effect on the note liability, misstate the amount for the accrual period, or both, which would not correctly represent the adjusting entry for interest on the note.

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