Question

During the year, Calabash Clinic made a $50,000 cash payment toward its bank loan, which it had previously recorded; $40,000 was for principal, and $10,000 was to pay the full amount of interest due. What is the best way for this transaction to be recorded?

Answer 1

Debit Loan payable $40,000

Debit Interest payable $10,000

Credit Cash account $50,000

Step-by-step explanation:

At the point the loan was taken, the entries posted must have been

Debit Cash account

Debit Interest expense

Credit Loan payable

Credit Interest payable

(with the loan amount and interest on the loan)

On settlement of the loan and the interest

Debit Interest payable

Debit Loan payable

Credit cash account

(with the amount paid back for the loan and interest)

Answer 2

Dr Interest Payable $10,000

Cr Notes Payable $40,000

Cr Cash $50,000

Step-by-step explanation:

When the loan was raised the entry was:

Dr Cash $40,000

Cr Notes Payable $40,000

The interest on this loan was accounted for:

Dr Interest Expense $10,000

Cr Interest Payable $10,000

So the correct entry for paying interest and principal amount would be:

Dr Interest Payable $10,000

Cr Notes Payable $40,000

Cr Cash $50,000