Question

Borrower Company borrowed $100,000 from Bank B on May 1 of Year 1. The annual interest rate on the loan is 12%. Borrower Company will repay the entire loan, both principal and accrued interest, after one year on April 30 of Year 2. So, Borrower Company will pay NO CASH to Bank B between May 1 of Year 1 and April 30 of Year 2. Which ONE of the following is included in the books of Borrower Company to record the payment of cash, both principal and accrued interest, on April 30 of Year 2? Assume that any necessary adjusting entry was correctly made on December 31 of Year 1. Hint: The total amount of cash paid by Borrower Company on April 30 of Year 2 is $112,000; this entire cash payment is recorded in one beautiful journal entry. DEBIT to Interest Expense for $8,000 ODEBIT to Interest Payable for $12,000 ODEBIT to Interest Payable for $8,000 ODEBIT to Interest Expense for $12,000 DEBIT to Interest Payable for $4,000

Answer 1

The options are partially given. However by considering the above options the answer is DEBIT to Interest Payable for $8,000.

On December 31, the adjusting entry is

Date	Accounts and Explanation	Debit	Credit
Dec,31	Interest Expense A/c                   Dr	$8,000
	To Interest Payable A/c		$8,000
	(Being the interest accrued for 8 months on loan of $100,000)

On April 30, the Journal entry for repayment of Loan along with Interest is

Date	Accounts and Explanation	Debit	Credit
Apr,30	Interest Payable A/c                      Dr	$8,000
	Interest Expense A/c                     Dr	$4,000
	12% Loan A/c                               Dr	$100,000
	To Cash A/c		$112,000
	(Being the Loan repaid along with the Interest for 12 months)

Explanation: On December 31 the interest expense accrued till date is transferred to Interest Payable, upon payment i,e., on April 30 the Interest Payable ($8,000) is debited along with Interest Expense ( Jan-19 to Apr-19 - $4,000). Total $12,000.

The correct entry is shown above.