On October 1,2018,Teton Industries negotiates with its bank to borrow $20,000 cash on a one-year note.The bank charges 5% interest.Interest payments are to be made in two installments,on March 31 and September 30.The principal is to be repaid on September 30,2019,the maturity date.What journal entry needs to be recorded as of March 31,2019?
A)Debit Interest Payable $250,debit Interest Expense $250,and credit Cash $500.
B)Debit Interest Expense $500 and credit Cash $500.
C)Debit Interest Expense $500 and credit Interest Payable for $500.
D)Debit Interest Expense $250 and credit Cash for $250.

Question

Quizplus · Accepted Answer

Debit Interest Payable for the amount that was accrued on December 1,2018 of $250 (or $20,000 × 0.05 × 3 / 12),debit Interest Expense for interest incurred in January through March of $250 (or $10,000 × 0.05 × 3 / 12),and credit Cash for the full interest payment due of $500 (or $20,000 × 0.05 × 6 / 12).

On October 1,2018,Teton Industries Negotiates with Its Bank to Borrow