The Appleton Company borrowed $100,000 on May 1,2014.The note,which is due on May 31,2015,included interest at 12%.The note is due on April 30,2015.The company's fiscal year ends on May 31.The company recorded an adjusting entry to recognize $1,000 of interest expense for the year ended May 31,2014.Appleton paid the note and interest owed on April 30,2015.How would the company record this transaction?
A)Debit Notes Payable for $100,000,debit Interest Expense for $12,000,and credit Cash for $112,000.
B)Debit Notes Payable for $100,000,debit Interest Expense for $11,000,debit Interest Payable for $1,000,and credit Cash for $112,000.
C)Debit Interest Expense for $1,000 and credit Interest Payable for $1,000.
D)Debit Notes Payable for $112,000 and credit Cash for $112,000.
E)Debit Cash for $112,000 and credit Notes Payable for $112,000.

Question

Quizplus · Accepted Answer

The company borrowed $100,000 on May 1, 2014, and the note includes interest at 12%, which accrues from May 1, 2014, to April 30, 2015. Therefore, the interest expense for the year ended May 31, 2014, is $1,000 ($100,000 × 12% × 11/12).

On April 30, 2015, Appleton paid the note and interest owed. The entry to record the payment should be a debit to Notes Payable for $100,000, debit to Interest Expense for $11,000 ($100,000 × 12% × 12/12), debit to Interest Payable for $1,000 (the interest accrued but not yet paid), and a credit to Cash for $112,000. Therefore, option B is the correct answer.

The Appleton Company Borrowed $100,000 on May 1,2014