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On May 1, 2024, Dooley borrowed $250,000 from Prime Bank by signing a three-year, 6% note payable. Interest is due each May 1. What adjustment, if any, should Dooley record on December 31, 2024?

a) Accrued interest expense of $15,000
b) Accrued interest revenue of $15,000
c) Accrued interest expense of $7,500
d) Accrued interest revenue of $7,500

Answer :

Final Answer:

Dooley should record an accrued interest expense of $7,500 on December 31, 2024. Option (c) is the correct answer.

Explanation:

Since Dooley borrowed the money on May 1, 2024, and the first interest payment is due on the following May 1, the first seven months of interest accrue in 2024.

Here's how to calculate the accrued interest expense:

  • Calculate the daily interest rate: Divide the annual interest rate by the number of days in a year (365 or 366, depending on the year):

Daily interest rate = 6% / 365 ≈ 0.0164%

  • Calculate the number of days for which interest has accrued:

Number of days = December 31, 2024 - May 1, 2024 = 244 days

  • Multiply the daily interest rate by the principal amount and the number of days to find the accrued interest:

Accrued interest = 0.0164% * $250,000 * 244 days ≈ $7,500

Therefore, Dooley should record an accrued interest expense of $7,500 on December 31, 2024, to account for the interest that has accumulated but is not yet due.

Option (c) is the correct answer.

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Rewritten by : Jeany

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