Question

On December 1, Campbell Co. borrowed $10,000 cash from Second Bank by signing a 90-day, 6% interest-bearing note. On December 31, Campbell accrued interest expense of $50. Campbell does not use reversing entries. On March 1, the due date of the note, Campbell will record the payment with debit entries to which of the following accounts?

A. Cash for $10,150
B. Interest Payable for $50
C. Notes Payable for $10,000
D. Interest Expense for $100

Answer 1

Campbell Co. will record debits to Notes Payable for $10,000 and Interest Expense for $100, and a credit to Cash for $10,150 on March 1.

Step-by-step explanation:

On March 1, when Campbell Co. makes the payment on the note due, it records the repayment of the $10,000 principal borrowed on December 1, along with the accrued interest for the 90-day period. The accrued interest is calculated using the formula: Interest = Principal × Rate × Time in years. For the 90-day period, this amounts to $10,000 × 6% × (1/3) year, resulting in $150 in accrued interest.

The student's question mentioned an accrued interest expense of $50 by December 31, indicating that by the end of December, $50 of the total accrued interest had been recognized. This implies that for the remaining two months (January and February), an additional $100 in interest had accrued ($200 total interest for 90 days – $50 recognized in December). Therefore, the total accrued interest expense by March 1 is $150 (accrued up to December) + $100 (accrued for January and February) = $250.

To record this transaction, Campbell Co. would make journal entries. It would debit the Interest Expense account for the remaining $100 of interest not yet accounted for, debit the Notes Payable account for $10,000 (the principal), and credit the Cash account for the total payment of $10,150. This accounting entry accurately reflects the repayment of the principal and the accrued interest expense, ensuring that the company maintains accurate financial records in accordance with accounting principles.