A business borrowed $40,000 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 $600
B) debit to Interest Expense $600
C) credit to Cash for $40,000
D) credit to Cash for $46,300

Question

Quizplus · Accepted Answer

The interest on the note is calculated as follows:

Interest = Principal x Rate x Time
Interest = $40,000 x 9% x (60/360)
Interest = $600

Therefore, on April 30, when the note is paid, the entry should be:

Debit: Notes Payable $40,000
Debit: Interest Expense $600
Credit: Cash $40,600

Option A is incorrect because Interest Payable is a liability account and would only be debited if the interest had not been recorded before the payment was made.

Option C is incorrect because it does not account for the interest payable on the note.

Option D is incorrect because it includes the interest expense as part of the payment, which is not accurate.

A Business Borrowed $40,000 on March 1 of the Current