On July 1, 2016, Goode Company borrowed $100,000. The company signed a note payable with interest at 6 percent per year. The note and interest are due on December 31, 2016. On December 31, 2016, Goode paid $103,000 to settle the debt in full. Assuming no accruals for interest have been made during the year, transaction analysis of the $103,000 cash payment on December 31, 2016 should reflect which of the following?

Question

Quizplus · Accepted Answer

The payment of $103,000 on December 31, 2016, represents the full settlement of the note payable and accrued interest. The company had borrowed $100,000 and accrued interest for six months at a rate of 6 percent per year. The accrued interest, which is $100,000 x 6% x 6/12 = $3,000, is included in the payment. Thus, the payment of $103,000 on December 31, 2016, results in a decrease in liabilities of $100,000 (the principal amount of the note payable), a decrease in stockholders' equity of $3,000 (the interest expense), and a decrease in assets of $103,000 (the cash paid to settle the debt). Therefore, option D is the correct choice.

On July 1, 2016, Goode Company Borrowed $100,000