Majeau Tri Ltd bought display racks with a fair market value of $150,000.The corporation signed a 3-year interest-bearing note at 8%.The entry to record the transaction would include:
A) A debit to Notes Payable for $150,000.
B) A debit to Interest Expense for $12,000.
C) A credit to Notes Payable for $150,000.
D) A credit to Interest Payable for $400.
E) A credit to Notes Payable for $39,692.

Question

Quizplus · Accepted Answer

When Majeau Tri Ltd signed a note to buy display racks, it created a liability known as Notes Payable. The fair market value of the display racks, which is $150,000, is credited to the asset account. Thus, the correct entry to record the transaction is to debit the asset account for $150,000 and credit the Notes Payable account for the same amount. Neither Interest Expense nor Interest Payable should be recorded at this time because the company has not yet paid or accrued any interest. Option A is incorrect because it mistakenly debits the Notes Payable account instead of crediting it. Option B is incorrect because it records an interest expense that has not yet been accrued. Option D is incorrect because there is no interest payable to record yet. Option E is incorrect because it calculates the interest expense for the entire 3-year period but records only the first year's interest.

Majeau Tri Ltd Bought Display Racks with a Fair Market