Cannon Ltd bought display racks with a fair market value of $150,000.The corporation signed a 3-year interest-bearing note at 8%.The entry to record the transaction would include
A)A debit to Notes Payable for $150,000
B)A debit to Interest Expense for $12,000
C)A credit to Notes Payable for $150,000
D)A credit to Interest Payable for $400
E)A credit to Notes Payable for $39,692

Question

Quizplus · Accepted Answer

The entry to record the purchase of the display racks with a fair market value of $150,000 would include a credit to Cash (assuming the company paid cash for the purchase) and a debit to the appropriate asset account (e.g. Display Racks).

The subsequent signing of a 3-year interest-bearing note at 8% would result in a credit to Notes Payable (the liability being incurred) and a debit to Cash (assuming the company received cash in exchange for the note). As no interest has accrued yet, there would be no entry to recognize interest expense or interest payable.

Option A is incorrect because a debit to Notes Payable would result in double-counting the liability.

Option B is incorrect because the interest expense has not yet accrued.

Option D is incorrect because interest payable has not yet been incurred.

Option E calculates the amount of interest that would accrue over 3 years at 8%, but the question does not ask for the total interest expense over the life of the note.

Cannon Ltd Bought Display Racks with a Fair Market Value