Part 1Pegasus Corp. signed a threeminus−month, 1010% note on November 1, 2023 for the purchase of $ 210,000$210,000 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 $ 210,000$210,000 B. debit to Interest Expense for $ 3,500$3,500 C. debit to Note Payable for $ 210,000$210,000 D. debit to Interest Expense for $ 5,250$5,250

Question

Part 1Pegasus Corp. signed a threeminus−​month, 1010​% note on November​ 1, 2023 for the purchase of $ 210,000$210,000 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 $ 210,000$210,000 B. debit to Interest Expense for $ 3,500$3,500 C. debit to Note Payable for $ 210,000$210,000 D. debit to Interest Expense for $ 5,250$5,250

BlackTom AI · Accepted Answer

We start by restating the problem to ensure we’re evaluating the same facts: Pegasus Corp. signed a three-month, 10% note on November 1, 2023 for $210,000 to purchase inventory. Adjusting entries are made at year-end (January 31, 2024 in this case). We need to determine what the January 31, 2024 adjusting entry will include.

Option A: credit to Note Payable for $210,000. This would imply reducing the principal of the note payable, as if the company had paid off the principal amount. However, at January 31, 2024, the note is still outstanding (matures around February 1, 2024), and no principal payment has been made. The principal remains a liability; thus, a credit to Note Payable to reduce it is inappropriate at this date.

Option B: debit to Interest Expense for $3,500. The interest amount for three months on a $210,000 note at 10% annual rate is 210,000 × 0.10 × (3/12) = 5,250. Therefore, $3,500 is not the correct accumulated interest. This option underestimates the interest and also doesn’t specify the proper credit entry that should accompany an interest accrual.

Option C: debit to Note Payable for $210,000. This would reduce the note payable by the full face amount. Since the note is still outstanding and not yet paid, this is not the correct treatment for an adjusting entry at year-end. The proper adjusting entry would typically involve interest (not principal) accrual and would credit Interest Payable (not reduce Note Payable) unless the note payoff occurred.

Option D: debit to Interest Expense for $5,250. The amount $5,250 matches the correct interest accrual for three months on a $210,000 note at 10% annual rate (210,000 × 0.10 × 0.25 = 5,250). This reflects recognizing the cost of borrowing incurred during the period. However, an adjusting entry for interest would normally credit Interest Payable (or Interest Expense and Interest Payable if the interest has not yet been paid). In isolation, this option correctly identifies the amount that should appear on the interest side, but it omits detailing the corresponding credit side.

In sum, each option contains a specific misalignment with standard adjusting-entry practice: A and C improperly affect the principal, B uses an incorrect interest amount, and D correctly states the interest figure but is incomplete without specifying the offsetting credit. The combination of a correct interest amount with the appropriate offsetting credit is what finalizes the proper adjusting entry for the end of January. Yet, among the provided choices, only one explicitly aligns with the nature of a year-end adjustment that involves reducing liabilities or recognizing accrued interest in the proper account space, while the others misstate either principal impact or incorrect interest figures.

Homework:Practice exam 1

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