Question

Jones borrowed $960 from the bank, issuing a 12.5%, 4-month promissory note. Assuming that the note is issued and paid in the same accounting period, Jones' entry on the date of payment will include a A. Debit to notes payable for $960B. Debit to interest payable for $40C. Credit to cash for $960D. Debit to interest receivable for $40

Answer 1

Option A and B are correct.

Because the in the double entry system we record issuance of promissory note as under:

Dr Cash or Bank 960 (Increase in Asset is reflected as Debit)

Cr Promissory Note 960 (Increase in Liability is reflected as Credit)

When the interest is accrued then the entries we pass are as under:

Dr Interest Expense 40 (Increase in Expense is reflected as Debit)

Cr Interest Payable 40 (Increase in Liability is reflected as Credit)

Interest payable = $960*12.5%*4months/12months=$40

The interest paid on the Promissory note will be treated as under:

Dr Interest Payable 40 (Decrease in Liability is reflected as Debit)

Cr Cash or bank 40 (Decrease in Assets is reflected as Credit)

Interest payable = 960*12.5%*4months/12months

When the Promissory note will be paid the entry will be:

Dr Promissory Note 960 (Decrease in Liability is reflected as Debit)

Cr Bank or Cash 960 (Decrease in Assets is reflected as Credit)

Option A and B are correct because the entry at the date of payment will be Payment of promissory note and interest payments. One part of the entry of option A can be seen in the last entry, whereas the entry of option B can be seen in the second last entry. Both decreases the amount of cash by $1000 so option C is incorrect and the option D is also incorrect because promissory notes are payables not receivables.