On November 1, Alan Company signed a 120-day, 8% note payable, with a face value of $9,000. Alan made the appropriate year-end accrual on December 31. What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made?
A)Debit Notes Payable $9,000; debit Interest Payable $120; credit Cash $9,120.
B)Debit Cash $9,240; credit Notes Payable $9,240.
C)Debit Notes Payable $9,240; credit Interest Payable $120; credit Interest Expense $120; credit Cash $9,000.
D)Debit Notes Payable $9,000; debit Interest Payable $120; debit Interest Expense $120; credit Cash $9,240.
E)Debit Notes Payable $9,000; debit Interest Expense $240; credit Cash $9,240.

Question

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The note payable had a face value of $9,000 and an 8% interest rate, which means that the interest expense for 120 days (from November 1 to March 1) would be ($9,000 x 8% x 120/360) = $240. The appropriate year-end accrual on December 31 would be to debit Interest Expense $120 and credit Interest Payable $120.

As of March 1, the note payable and accrued interest must be paid. The journal entry would be:
Debit Notes Payable $9,000
Debit Interest Payable $120
Debit Interest Expense $120
Credit Cash $9,240

Option A is incorrect because it only records the payment of the note and not the interest expense. Option B is incorrect because it only records the payment of the note and not the interest expense that has accrued. Option C is incorrect because it does not include the payment of the note. Option E is incorrect because it does not match the accrued interest with the period of the note payable.

On November 1, Alan Company Signed a 120-Day, 8% Note