The Pita Pit borrowed $206,000 on November 1, 2021, and signed a six-month note bearing interest at 12%. Principal and interest are payable in full at maturity on May 1, 2022. In connection with this note, The Pita Pit should report interest expense at December 31, 2021, in the amount of:

The Pita Pit should report interest expense at December 31, 2021, in the amount of: $4,120

Explanation:

The interest amount Pita Pit had to pay for the loan:

($206,000 x 12%)/12 x 6 = $12,360

Principal and interest are payable in full at maturity on May 1, 2022.

On December 31, the company had borrowed the $206,000 for two months. Following the Accrual basis, Pita Pit would report interest expense for two months at December 31, 2021:

($206,000 x 12%)/12 x 2 = $4,120

The adjusting entry:

Debit Interest expense $4,120

Credit  Interest Payable $4,120

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