Martinez Co. borrowed $50,000 on March 1 of the current year by signing a 60-day, 9%, interest-bearing note. Assuming a 360-day year, when the note is paid on April 30, the entry to record the payment should include a
A) debit to Interest Payable for $750
B) debit to Interest Expense for $750
C) credit to Cash for $50,000
D) credit to Cash for $54,500

Question

Quizplus · Accepted Answer

The interest on the note can be calculated using the formula:

Interest = Principal x Rate x Time

Time is calculated as 60/360 = 1/6 of a year.

Interest = $50,000 x 0.09 x 1/6 = $750

Since the note is being paid off, the entry would be to debit the liability account (Notes Payable) for $50,000, debit the expense account (Interest Expense) for $750, and credit the asset account (Cash) for $50,750 ($50,000 + $750 interest). Therefore, the correct option is B, debit to Interest Expense for $750.