On November 1, Carter Company signed a 120-day, 10% note payable, with a face value of $9,000. Carter made the appropriate year-end accrual. What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made?
A) Debit Notes Payable $9,000; debit Interest Payable $150; credit Cash $9,150.
B) Debit Cash $9,300; credit Notes Payable $9,300.
C) Debit Notes Payable $9,300; credit Interest Payable $150; credit Interest Expense $150; credit Cash $9,000.
D) Debit Notes Payable $9,000; debit Interest Payable $150; debit Interest Expense $150; credit Cash $9,300.
E) Debit Notes Payable $9,000; debit Interest Expense $300; credit Cash $9,300.

Question

Quizplus · Accepted Answer

The face value of the note is $9,000, which is the amount that needs to be paid at maturity. However, during the 120-day term, interest has accrued on the note at a rate of 10% per year. The interest accrued can be calculated as follows:

$9,000 x 10% x 120/360 = $300

The interest payable at the end of the year-end is $150 ($300/2 since the note is only for 120 days. The proper journal entry to record the payment of the note at maturity is therefore:

Debit Notes Payable $9,000 
Debit Interest Payable $150 
Debit Interest Expense $150 
Credit Cash $9,300

The debits to Notes Payable and Interest Payable reflect the retirement of these liabilities, while the debit to Interest Expense recognizes the interest expense for the entire 120-day term of the note. The credit to Cash reflects the payment of the matured note plus accrued interest.

On November 1, Carter Company Signed a 120-Day, 10% Note