On November 1, 2020, France Corp. signed a three-month, zero-interest-bearing note for the purchase of $ 60,000 of inventory. The maturity value of the note was $ 60,600, based on the bank's discount rate of 4%. The adjusting entry prepared on December 31, 2020 in connection with this note will include a
A) debit to Note Payable for $ 400.
B) credit to Note Payable for $ 400.
C) debit to Interest Expense for $ 600.
D) credit to Interest Expense for $ 200.

Question

Quizplus · Accepted Answer

DThe correct answers are B) credit to Note Payable for $ 400 and D) credit to Interest Expense for $ 200. The interest for two months (December and January) on a $60,000 note, with a maturity value of $60,600 and an annual discount rate of 4%, needs to be accounted for. The total interest for three months is $600 ($60,600 - $60,000), so for two months, it's $400 ($600 * 2/3). This $400 is credited to Note Payable to adjust its carrying amount. The interest expense for one month (December) is $200 ($600 / 3), which is credited to Interest Expense to recognize the expense incurred in December.