Question

On December 1, 2022, Escobar Consulting, which uses a calendar year as its fiscal year, signs a $4,000, 12%, four-month note payable. Journalize the entry to record the payment of the note and entire interest on April 1, 2023.
A. Debit Notes Payable $4,160 Credit Interest Expense 160 Credit Cash $4,000
B. Debit Notes Payable $4,160 Credit Cash $4,160 You got it wrong :
C. Debit Notes Payable $4,000 Debit Interest Expense 160 Credit Cash $4,160 This is correct answer :
D. Debit Notes Payable $4,000 Debit Interest Expense 120 Debit Interest Payable 40 Credit Cash $4,160

Answer 1

Answer:

D. Debit Notes Payable $4,000 Debit Interest Expense 120 Debit Interest Payable 40 Credit Cash $4,160

Explanation:

The journal entry is shown below:

Note payable Dr $4,000

Interest expense $120  (($4,000 × 12% × 4 months ÷ 12 months) - $40)

Interest payable  $40 ($4,000 × 12% × 4 months ÷ 12 months ÷ 4 month)

     To Cash $4,160

(being cash paid is recorded)

Here the note payable, interest payable and interest expense is debited as it decreased the liabilities and increased the expenses while on the other hand the cash is credited as it decreased the assets