Interest Payable. At its December 31 year-end, the company holds a mortgage payable that has incurred $1,125 in annual interest that is neither recorded nor paid. The company intends to pay the interest on January 7 of the next year.

From all indications,it is very clear that the question requires a journal entry to record the unpaid interest.

Dr Interest expense             $1125

Cr Interest payable                         $1125

Explanation:

This is a typical case of an omitted entry in the books of accounts,specifically it relates year-end close accounting adjustments.

Under the accrual basis, which is prevalent in the  private sector,expenses are to recorded when incurred not when they are settled in cash,as result it is imperative that the above transaction needs be adjusted by debiting interest expense account and crediting same amount to interest payable account to affirm that the company has an obligation to $1125 to mortgage providers.

the correct choice is a