Franklin Company issued a $40,000 note to the Mercantile Bank on August 1, Year 1. The note carried a one-year term and a 12% rate of interest. How will the adjusting entry, dated December 31, Year 1, to record accrued interest expense impact the elements of the financial statements

Increase liabilities and decrease equity by $2,000

Explanation:

The journal entry to record accrued interest is shown below:

Interest Expense a/c                  Dr.    $2,000            

           To Interest Payable                     $2,000        

(Being Interest accrued is recorded)

For recording this we debited the interest expense as it decreased the equity and credited the interest payable as it increased the liabilities  

The computation is shown below:

= $40,000 × 12% × 5 months ÷ 12 months

= $2,000

The 5 months is taken from August 1 to December 31

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