Question: As of December 31, $2,500 of interest expense has accrued on a $50,000 note payable. The note payable and the accrued interest will become due and payable next year. How will the interest affect the adjustments at the end of the period?

Interest Expense does not affect this period since it will not be paid. The expense will be recorded when the note and interest are paid in full.

Interest Expense should be increased, because the cost of interest relates to the current period.

Note Payable should be increased to reflect the additional interest that will be due when the note is paid off next year.

Interest Receivable should be increased to reflect the accrued interest on the note payable.