Jupiter, Inc. signed a oneminusyear $44,000 note payable at 8% interest on April 1, 2016. If Jupiter, Inc. only adjusts its accounts once a year at yearminusend, how much interest expense was accrued on December 31, 2016? (Round any intermediate calculations to two decimal places, and your final answer to the nearest whole number.)

Dec 31 2016  Interest expense   2640 Dr

                          Interest payable      2640 Cr

Explanation:

the adjusting entry is made at the end of the period which is 31 December 2016 here. The notes pays interest at 8% per annum. So, the total interest due for one year on note payable is,

Interest = 44000 * 0.08 = 3520

Out of this amount of interest payable, 9 month's interest related to  period from April to December. So, at 31 December, we will recognie 9 month's interest as interest expense 3520 * 9/12 = 2640. And debit interest expense account by this figure. As the interest is not paid today, we will credit interest payable.

$2,640

Explanation:

Accrual basis accounting recognizes both expenses and revenues during the periods that they occur, not when they are actually paid or collected.

In this case, we need to recognize as accrued interest the amount corresponding to 9 months (April to December):

accrued interest = principal x yearly interest x 9/12 months = $44,000 x 8% x 9/12 = $2,640

the appropriate journal entry to record the adjustment:

Dr Interest expense 2,640

    Cr Accrued interest payable 2,640

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