Indigo had previously purchased inventory from Larry for $40 000. On 1 October Indigo gave Larry a 90-day, bill of exchange to cover the amount of the account payable plus interest at 10% p.a. The correct accounting entry in Indigo's books to record the settlement of the bill at maturity is:

Question

Quizplus · Accepted Answer

The correct accounting entry is to debit bills payable for $40,986, debit interest expense for $986, credit bank for $40,986, and credit unexpired interest for $986. This is because the bill of exchange is a liability that Indigo has to pay to Larry, and the interest expense is the cost of borrowing the money from Larry. The bank account is credited for the amount of the bill of exchange, and the unexpired interest account is credited for the amount of interest that has not yet been earned.

Indigo Had Previously Purchased Inventory from Larry for $40 000