Question

Melanie Corp. borrowed $124,000 cash on September 1, 2016, and signed a one-year 6%, interest-bearing note payable. The interest and principal are both due on August 31, 2017, Assume that the appropriate adjusting entry was made on December 31, 2016 and that no adjusting entries have been made during 2017. Which of the following would be the required journal entry to pay the note on August 31, 2017?

A. Notes payable 124,000, Interest expense 7,440, Cash 131,440
B. Interest expense 4,960, Interest payable 2,480, Notes payable 124,000, Cash 131,440
C. Interest expense 7,440, Cash 7,440
D. Interest payable 2,480, Notes payable 124,000, Cash 126,480

Answer 1

B is the correct option

Step-by-step explanation:

On August 31 2017,which is the expiration date of the loan of $124,000,the actual loan amount needs to be paid alongside total interest due on the loan.

However,on 31st December,four month period interest would have been calculated debited to interest expense and credited to interest payable i.e$124000*6%*4/12=$2480

On 31st the balance of interest needs to be calculated as:$124,000*6%*8/12=$4,960

Hence the correct option should the following entries:

Dr Notes payable $124,000

Dr interest payable $2480

Dr interest expense $4,960

Cr cash $131440