On December 1, Campbell Co. borrowed $10,000 cash from Second Bank by signing a 90-day, 6% interest-bearing note. On December 31, Campbell accrued interest expense of $50. Campbell does not use reversing entries. On March 1, the due date of the note, Campbell will record the payment with debit entries to which of the following accounts

A. Debit Notes Payable $10,000
B. Debit Interest Expense $100
C. Debit Interest Payable $50
D. Credit Cash $10,150

Option A and B

Explanation:

The entry on 1 March would be:

Dr Interest Expense $100 $10,000 * 6% * 2/12

Dr Notes Payable $10,000

Cr Cash Account             $10,100

The above entry shows that the debit entry is option A and B.

When the liability is paid off the entry is debit to liabilities with the amount paid which means the option A is also correct.

The interest expense of 1 month which is $50 ($10,000 * 6% * 1/12) has been already recognized which means the remainder 2 month expense must be recognized which is $100 ($10,000 * 6% * 2/12). Hence option B is also correct.

A. Debit Notes Payable $10,000

B. Debit Interest Expense $100

C. Debit Interest Payable $50

Explanation:

A liability was recorded at the time of issuance as below

Dr. Cash               $10,000

Cr. Note Payable $10,000

So, on March 1 the Note Payable account will be debited.

Interest was also accrued on December 31, as below

Dr. Interest Expense  $50

Cr. Interest Payable   $50

So, on March 1 the Interest Payable account will be debited.

On March 31, Interest of 2 months is also accrued and expense will be recorded with the payment of Note as a debit entry to interest expense account.

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