accounting

Question

Draxon Company borrowed $30,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be:

 

I know the answer is debit Interest Expense, $150; credit Interest Payable, $150 but do not know how they got it 

Answer 1

Interest on short-term notes is calculated as Principal * rate * time.

Interest is in annual terms so time has to be in annual terms also.

 

30,000 x .06 * 3/12 = $450

 

$50 for 3 months is $150 per month.