Question

On September 1, 2018, ABC signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on March 1, 2019. ABC records the appropriate adjusting entry for the note on December 31, 2018. In recording the payment of the note plus accrued interest at maturity on March 1, 2019, ABC would

Answer 1

Answer: b. Debit Interest Expense, $1,500.

Explanation:

On the date of maturity in 2019, the journal entry will look something like this:

Date                 Account title                                          Debit                Credit

March 2019     Note Payable                                   $100,000

                        Interest Payable                               $3,000

                         Interest expense                             $1,500

                        Cash                                                                              $104,500

The interest payable is the portion of interest that accrued in the 4 months in 2018 which was in the previous period so would have to be recorded as a liability instead of an expense.

The interest expense is for the interest accrued in 2019 which would be for 2 months and is:

= 100,000 * 9% * 2/12

= $1,500