Question

Cuthill Corporation has 2 loans outstanding: $10398 taken on Feb 1, 20x1 at 8% interest • $25497 taken on Nov 30, 20x1 at 12% interest. The final year-end adjusting entry for interest expense for the year 20x1 will be: Select one: O a. A debit to interest expense of $ 1017 O b. A debit to interest expense of $ 948 O C. A credit to interest expense of $ 1203 d. A credit to interest expense of $ 1272 Check On June 1, 20x7. Cambo Corp. paid an annual business insurance premium of $5068. Att 107 and the adiusting entries are being prepared. W

Answer 1

1.

Interest expense on loan 1 = Loan x Interest rate x Time period

= 10,398 x 8% x 11/12

= $762.52

Interest expense on loan 2 = Loan x Interest rate x Time period

= 25,497 x 12% x 1/12

= $254.97

Total interest expense = Interest expense on loan 1 + Interest expense on loan 2

= $1,017.49

= $1,017 (rounded to whole dollar)

At the end of he year, interest expense will be debited and interest payable will be credited by $1,017

Correct option is (a)

2.

Annual insurance expense = $5,068

Insurance expense for 7 months = 5,068 x 7/12

= $2,956

Prepaid insurance on December 31 = Annual insurance expense - Insurance expense for 7 months

= 5,068 - 2,956

= $2,112

At the end of the year, prepaid insurance will be debited and insurance expense will be credited by $2,112

Correct option is (b)

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