Question

On June 1, Sawyer Co. borrowed $5,000 by extending their past-due account payable with a 45-day, 12% interest-bearing note. On July 16, the due date, Sawyer pays the amount due in full. Sawyer would record this payment with a (debit/credit) _______ to Interest Expense in the amount of _______.
A. credit; $600

B. debit; $75

C. debit; $600

D. credit; $75

Answer 1

Answer:

The correct answer is Option B.

Explanation:

Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

The interest expense on the notes is calculated as: Principal x Interest Rate x Time

In this case, the total interest expense is $5,000 x 12%/12 x 1.5 months = $75.

Therefor, total debit to interest expense is $75.

Answer 2

Answer:

The correct answer is D)

Explanation:

The amount borrowed is an expense to Sawyer Co. Therefore it has to be recorded as a credit transaction in their Interest Expense Account by the interest on the $5,000 that was borrowed.

The interest on the $5,000 is calculated by apply the rate (12%) on $5,000.

= 5000(12/100)

= 50*12

= $600

The actual amount is gotten by dividing the interest by 12 months and multiplying by a month and a half (45 days) assuming that a month is 30 days.

= (600/12)1.5

= $50 * 1.5

= $75

The principle of double-entry in accounting states that you must always credit any increase in liability and debit a decrease in an amount due to another.  

 

Cheers!