Question

Four Loco borrowed $100,000 cash on a 1-year, 6% notes payable. Four Loco has to pay both the principal and interest on October 31st, 2019. The last entry was made on 12/31/2018. What will be recorded on October 31, 2019?

A) An increase in assets and equity.
B) A decrease in liabilities.
C) An increase in expenses.
D) A decrease in cash.

Answer 1

Four Loco will record a decrease in cash and liabilities when they repay the $100,000 principal and $6,000 interest on October 31, 2019, as they complete the payment on their 1-year notes payable.

Step-by-step explanation:

On October 31, 2019, Four Loco will record a decrease in cash and a decrease in liabilities when it repays the $100,000 principal along with the interest for one year at a 6% interest rate on the notes payable. Here's the breakdown of the transaction:

• Interest for one year: $100,000 × 6% = $6,000
• Total to be repaid (Principal + Interest): $100,000 + $6,000 = $106,000

The entries on October 31, 2019, in Four Loco's books would likely be a debit to the notes payable for the $100,000 principal, a debit to interest expense for the $6,000 interest, and a credit to cash for the total $106,000. This results in paying off the liability (notes payable), recording the expense (interest), and reducing the asset (cash).