Question

Havier Corporation borrows $1 million from a bank on September 1, year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later on June 1, year 2. Which of the following is recorded on June 1, year 2?

a) Principal repayment.

b) Accrued interest expense.

c) Recognition of interest income by the bank.

d) Adjustment of the loan term.

Answer 1

On June 1, year 2, Havier Corporation will record a principal repayment and an interest expense for the note payable, while the bank will recognize the interest income.

Step-by-step explanation:

The question involves the recognition of financial transactions with regard to a note payable and its settlement. When Havier Corporation repays the bank on June 1, year 2, the company will record the principal repayment and the accrued interest expense while the bank will recognize the interest income. No adjustment of the loan term is needed since the loan is being paid as per the original agreement.

To put it in terms of entries, on June 1, year 2, Havier Corporation would debit the notes payable and interest payable accounts to reflect the repayment of the principal and accrued interest, and credit the cash account to showcase the outflow of funds. On the bank's side, it would debit the cash account to represent the receipt of funds and credit the loan receivable and interest income to acknowledge the repayment of the principal and the earning of the interest.