Final answer:
The correct answer is option a. When interest is recorded on an interest-bearing note, the Interest Expense account is increased to reflect the cost of borrowing money, and concurrently, the Interest Payable account is also increased to represent the accrued but unpaid interest, which is a liability.
Step-by-step explanation:
When interest is recorded on an interest-bearing note, we usually see an increase in the Interest Expense account. This reflects the cost of borrowing money over the period for which the interest is calculated. Simultaneously, the Interest Payable account is increased.
This account represents a liability on the balance sheet and indicates the amount of interest that the company owes but has not yet paid. At the end of the accounting period, the accrued interest is recognized as an expense and the corresponding payable is established until such time as the interest payment is actually made.
Here's a simple example: If a company has taken out a loan at the beginning of the year and the interest for the first quarter comes to $1,000, the company would debit Interest Expense by $1,000, thus increasing it. Simultaneously, it would credit Interest Payable by $1,000, which increases that liability account. No cash is exchanged at this point; these entries purely reflect the company's accruing obligations.
It's important to understand these transactions for accurate financial reporting and understanding a company's financial position at any given time.