On May 1, a firm purchased equipment for $10,000, signing a 90-day note bearing interest at 12 percent. The entry to record the payment of the amount due on July 30 is (Assume 360 days in a year.)
A)debit Equipment $10,000 and a credit to Cash for $10,000.
B)debit Notes Receivable $11,200 and a credit to Cash for $11,200.
C)debit Notes Payable $10,000, a debit to Interest Expense for $300, and a credit to Cash for
$10,300.
D)a debit to Notes Payable $11,200, a debit to Interest Income for $1,200, and a credit to Cash for $11,200.

Question

Quizplus · Accepted Answer

The original purchase was made on credit, so the company would have recorded the following entry:
Debit Equipment $10,000
Credit Notes Payable $10,000

Now, 90 days have passed and the note is due. In addition to the original principal amount of $10,000, the company owes interest at a rate of 12 percent for 90 days (or 3 months), which can be calculated as follows:
$10,000 x 0.12 x (90/360) = $300

Therefore, to record the payment of the amount due on July 30, the following entry should be made:
Debit Notes Payable $10,000
Debit Interest Expense $300
Credit Cash $10,300

Option A is incorrect because it does not account for the interest owed on the note. 
Option B is incorrect because it assumes that the company is the one receiving the payment, whereas the question states that the company is making the payment. 
Option D is incorrect because it assumes that the company is the one receiving interest income, whereas the question states that the company is paying interest on the note.

On May 1, a Firm Purchased Equipment for $10,000, Signing