Question
Ironwood Supply borrowed money on a short-term note. Its year-end is December 31.
| Date | Event |
|---|
| April 1, 2026 | Borrowed $60,000 cash by signing a 1-year, 8% note payable. |
| December 31, 2026 | Accrued interest on the note. |
| April 1, 2027 | Repaid the note in full, together with all interest owed. |
Required: Prepare the journal entries for the borrowing, the December 31, 2026 interest accrual, and the April 1, 2027 repayment. Interest for 2026 covers 9 months; the remaining 3 months accrues in 2027.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IAS 1 — accrual basis of accounting
Adjusting entries exist to move revenue and expense into the period they belong to, regardless of when cash moved. Every adjusting entry touches at least one income statement account and one balance sheet account — and never the cash account, because the cash has either already moved or has not moved yet.
Common mistakes
- Debiting or crediting Cash in an adjusting entry — a reliable sign the entry is wrong.
- Adjusting for the full amount of a prepayment rather than only the expired portion.
- Missing accrued items entirely because no document prompted them — accrued interest and accrued wages are the usual casualties.
Further readingThe 5 types of adjusting entry