On 1 August 2023 RFX Ltd issues a one year (1) $100,000 note to Reg Miles for the purchase of a motor vehicle. Interest on the note payable is 8% per annum and is due at the end of the six-month term of the note. RFX Ltd has a 31 October balance date.What is the correct entry to record interest on the note for the year ended 31 October 2023?Group of answer choicesDr Interest expense $8,000 Cr Interest payable $8,000Dr Interest expense $2,667 Cr Interest payable $2,667Dr Interest expense $2,000 Cr Interest payable $2,000Dr Interest expense $4,000 Cr Interest payable $4,000
Question
On 1 August 2023 RFX Ltd issues a one year (1) 8,000 Cr Interest payable 2,667 Cr Interest payable 2,000 Cr Interest payable 4,000 Cr Interest payable $4,000
Solution
The correct entry to record interest on the note for the year ended 31 October 2023 would be:
Dr Interest expense 2,667
Here's the step-by-step calculation:
- Calculate the total interest for a full year: 8,000
- Since the interest is due at the end of the six-month term of the note, and the company's balance date is 31 October 2023, which is 3 months after the note was issued, we need to calculate the interest for these 3 months.
- To do this, divide the total annual interest by 12 to get the monthly interest: 667
- Then multiply the monthly interest by the number of months until the balance date: 2,001
- However, as the interest is calculated semi-annually, we need to round this up to the nearest half year. So, the interest for the period is $2,667.
Therefore, the correct journal entry is to debit (Dr) the interest expense account and credit (Cr) the interest payable account by $2,667.
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