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 an A. Debit to Notes Payable for $960. B. Debit to Interest Payable for $40. C. Credit to Cash for $960. D. Debit to Interest Receivable for $40
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When a promissory note is issued and paid in the same accounting period, the entry upon payment will include:
C. Credit to Cash for $960.
Explanation:
- The original borrowing is recorded with a debit to Cash (increasing the cash asset) and a credit to Notes Payable (reflecting the liability created).
- For a 4-month, 12.5% note, the interest expense would typically be calculated and paid at maturity. However, if the note is issued and paid within the same accounting period, the interest expense hasn't accrued, so there is no interest payable or receivable to account for in the entry at the time of payment.
- Upon payment, Jones simply debits Notes Payable to decrease the liability (as it's being paid off) and credits Cash to reflect the outgoing cash payment.