Vast Company signed a 180-day note, dated March 1, for $4,500 that Rationale Bank discounted at 10 percent. Which of the following journal entries records the payment of the note to the bank at maturity for Vast Company?
A) Debit Notes Payable by $4,275; credit Cash by $4,275
B) Debit Notes Payable by $4,500; credit Cash by $4,500
C) Debit Interest Expense by $225; credit Cash by $225
D) Debit Notes Payable by $4,275, Interest Expense by $225; credit Cash by $4,500

Question

Quizplus · Accepted Answer

When the note is paid at maturity, the full amount of the note (principal + interest) needs to be paid. In this case, the principal is $4,500 and the discount rate is 10%, which means the bank advanced only $4,050 (4500 x 0.10 = 450). Therefore, the amount to be paid at maturity is $4,500.

Option A is incorrect because it only accounts for the principal amount and therefore does not consider the interest.

Option C is incorrect because it considers only the interest.

Option D is incorrect because it understates the amount to be paid by recording only the discount amount as interest expense.

Vast Company Signed a 180-Day Note, Dated March 1, for $4,500