#9 Unrecorded Liability: Adjusting Entry
Refer to PE 4-8. (1) Make the adjusting entry necessary on the company’s books with respect
to this loan on December 31. (2) Make the journal entry necessary on the company’s
books on the following April 30 to record payment of interest for the first year of the loan.
Note: When making this April 30 entry, don’t forget the adjusting entry that was made on
December 31.
To make the adjusting entry necessary on December 31 for the unrecorded liability loan, you need to follow these steps:
1. Determine the amount of interest that has accrued since the loan was taken. This can be calculated using the interest rate and the period between the loan initiation and December 31.
2. Debit the Interest Expense account for the accrued interest amount. This account is an expense account and will increase the company's expenses.
3. Credit the Accrued Liabilities account for the same amount. This account is a liability account and will show the company's obligation for the accrued interest.
As for making the journal entry on April 30 to record the payment of interest for the first year of the loan, you need to follow these steps:
1. Determine the amount of interest to be paid for the first year of the loan. This is typically calculated by multiplying the loan principal by the interest rate for one year.
2. Debit the Interest Expense account for the interest paid. This will increase the expenses of the company.
3. Credit the Cash account for the same amount, as the interest payment is considered an outflow of cash.
It's important to note that when making the journal entry on April 30, you should also include the adjusting entry made on December 31. This means that in addition to the steps mentioned above, you should also debit the Accrued Liabilities account and credit the Interest Expense account by the same amounts recorded in the adjusting entry on December 31.