Question

On September 1, Knack Company signed a $50,000, 90-day, 5% note payable with Central Savings Bank. What is the journal entry that should be recorded by Knack upon maturity of the note? A) Debit Interest Expense $625; credit Interest Payable $625.
B) Debit Notes Payable $50,000; credit Interest Revenue $625; credit Cash $49,375.
C) Debit Cash $50,625; credit Notes Receivable $50,625.
D) Debit Notes Payable $50,625; credit Cash $50,625.
E) Debit Notes Payable $50,000; debit Interest Expense $625; credit Cash $50,625.

Answer 1

Answer:

E) Debit Notes Payable $50,000; debit Interest Expense $625; credit Cash $50,625.

Explanation:

The journal entry to record upon maturity of the note would be

Note Payable A/c Dr $50,000

Interest Expense A/c Dr $625

                    To Cash A/c $50,625

(Being the maturity of the note is recorded)

The interest expense is computed below:

= Principal × rate of interest × number of days ÷ (total number of days in a year)  

= $50,000 × 5% × (90 days ÷ 360 days)

= $625

We assume the total number of days in a year is 360 days