Rock Company borrows $4,000 for 120 days from National Bank on March 18. The bank charged a discount rate of 6 percent. Assume a 360-day year. Which of the following journal entries records the transaction on March 18 for Rock Company?
A) Debit Cash by $3,920; credit Notes Payable by $3,920
B) Debit Interest Expense by $80; credit Notes Payable by $80. Principal is recorded at maturity.
C) Debit Cash by $4,000; credit Notes Payable by $4,000. Interest expense is recorded at maturity.
D) Debit Cash by $3,920, debit Interest Expense by $80; credit Notes Payable by $4,000

Question

Quizplus · Accepted Answer

The correct journal entry is to debit Cash for the amount received ($3,920), debit Interest Expense for the interest cost of the loan ($80), and credit Notes Payable for the full amount of the note ($4,000). This reflects the receipt of cash, the expense of borrowing, and the obligation to repay the full amount.

Rock Company Borrows $4,000 for 120 Days from National Bank