Asked by Davies Mwanza on Jul 22, 2024
Verified
Martinez Co. borrowed $50,000 on March 1 of the current year by signing a 60-day, 9%, interest-bearing note. Assuming a 360-day year, when the note is paid on April 30, the entry to record the payment should include a
A) debit to Interest Payable for $750
B) debit to Interest Expense for $750
C) credit to Cash for $50,000
D) credit to Cash for $54,500
Interest Expense
The charge an entity incurs for using borrowed capital over a set period.
Interest Payable
The amount of interest expense that has accumulated but has not been paid by the end of the accounting period.
360-Day Year
An accounting assumption that a year consists of 360 days, which simplifies interest calculation by assuming each month has 30 days.
- Learn about the function of exclusive bank accounts in executing payroll tasks.
Verified Answer
JI
James IngramJul 22, 2024
Final Answer :
B
Explanation :
The interest on the note can be calculated using the formula:
Interest = Principal x Rate x Time
Time is calculated as 60/360 = 1/6 of a year.
Interest = $50,000 x 0.09 x 1/6 = $750
Since the note is being paid off, the entry would be to debit the liability account (Notes Payable) for $50,000, debit the expense account (Interest Expense) for $750, and credit the asset account (Cash) for $50,750 ($50,000 + $750 interest). Therefore, the correct option is B, debit to Interest Expense for $750.
Interest = Principal x Rate x Time
Time is calculated as 60/360 = 1/6 of a year.
Interest = $50,000 x 0.09 x 1/6 = $750
Since the note is being paid off, the entry would be to debit the liability account (Notes Payable) for $50,000, debit the expense account (Interest Expense) for $750, and credit the asset account (Cash) for $50,750 ($50,000 + $750 interest). Therefore, the correct option is B, debit to Interest Expense for $750.
Learning Objectives
- Learn about the function of exclusive bank accounts in executing payroll tasks.