A business borrowed $40,000 on March 1 of the current year by signing a 30-day, 9% interest bearing note. When the note is paid on March 31, the entry to record the payment should include a
A) debit to Interest Payable $300
B) debit to Interest Expense $300
C) credit to Cash for $40,000
D) credit to Cash for $43,600

Question

Quizplus · Accepted Answer

The interest on the note is calculated as follows:

$40,000 x 9% x 30/360 = $300

Therefore, the business will need to pay back a total of $40,300 ($40,000 principal + $300 interest) on March 31.

To record the payment, the entry would be:

Debit: Notes Payable $40,000 
Debit: Interest Expense $300 
Credit: Cash $40,300

So, the correct answer is option B, as it includes the debit to Interest Expense for the $300 of interest paid.

A Business Borrowed $40,000 on March 1 of the Current