Herrindale Mart borrows $420,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each...

Herrindale Mart borrows $420,000 on July 1 with a short-term loan that has an annual interest rate of 5% which is payable on the first day of each subsequent quarter.  

What entry will Herrindale Mart need to make to accrued interest on August 31, assuming that no accrual has yet been made?

Select one:

$7,000; Decrease liabilities and decrease cash

$21,000; Decrease liabilities and decrease cash

$7,000; Increase liabilities, decrease retained earnings

$3,500; Increase liabilities, increase expenses