Answer:
Increase liabilities and decrease equity by $2,000
Explanation:
Calculation for the accrual of interest on December 31, Year 1
Interest on Note Payable = $40,000 x 12% x 5/12 Interest on Note Payable= 2,000
Preparation of the journal entry
Dr Interest Expense 2,000
(Equity)
Cr Interest Payable 2,000
(Liabilities)
(Being Interest accrued)
Therefore based on the above Calculation The accrual of interest on December 31, Year 1 will Increase liabilities and decrease equity by $2,000
