Question

Jain Enterprises honors a short-term note payable. Principal on the note is $425,000, with an annual interest rate of 3.5%, due in 6 months. What journal entry is created when Jain honors the note?

a) Debit Cash $425,000; Credit Interest Expense $7,437.50
b) Debit Notes Payable $425,000; Credit Cash $441,875
c) Debit Interest Expense $7,437.50; Credit Notes Payable $425,000
d) Debit Cash $441,875; Credit Notes Payable $425,000

Answer 1

The correct journal entry to record Jain Enterprises honoring the note includes a debit to Notes Payable for the principal amount of $425,000 and a debit to Interest Expense for the accrued interest of $7,437.50. The Credit goes to the Cash account for the total amount paid of $432,437.50.

Step-by-step explanation:

When Jain Enterprises honors a short-term note payable with a principal of $425,000 at an annual interest rate of 3.5% due in 6 months, the correct journal entry is calculated by first determining the interest expense for the period. Since interest is accrued over half a year, the calculation for interest would be $425,000 × 3.5% × 0.5 years = $7,437.50. The total amount paid back is the sum of the principal and the accrued interest, which is $425,000 + $7,437.50 = $432,437.50. The correct journal entry to record the honoring of the note would be: Debit Notes Payable $425,000; Credit Cash $432,437.50; Debit Interest Expense $7,437.50.