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On December 1, 2022, Escobar Consulting, which uses a calendar year as its fiscal year, signs a $4,000, 12%, four-month note payable. Journalize the entry to record the payment of the note and entire interest on April 1, 2023
A)Debit Notes Payable $4,160
Credit Cash $4,160B)Debit Note.s Payable $4,000
Debit Interest Expense 120
Debit Interest Payable 40
Credit Cash $4,160C)Debit Notes Payable $4,000
Debit Interest Expense 160
Credit Cash $4,160D)Debit Notes Payable $4,000
Debit Interest Expense 160
Credit Cash $4,160I got the answer correct which was option B but thats only becasue I figured out the rest of the answers. I realised that since this a 4 month period the whole payment would have been made so trade payables would decrease .by 4000.The interest expense for march would be (4000*12%*1/4).The cash of $4000 was used to pay trade payables and 4/12*12%*4000 is the interest paid out of cash.However I am confused to where exactly the 120 comes from
Also I’m assuming the payables have been paid off if I’m right since this is only a 4 month period
At 31 December 2022 there was 1 months interest due but it had not been paid. Therefore $40 would have been charged in the SOPL and $40 would be recorded as an accrual (interest payable) in the statements for the year ended 31 December 2022.
In 2023 the pay interest of $160. $40 of it is paying the interest owing from the previous year and so debit interest payable. The other $120 is the interest for the current year and so debit interest expense.
Why is December 2022 not paid yet…if december 2022 is not paid yet…them jan feb and march of 2023 also would not have been paid yet right???
I’m sorry for the earlier question I meant I was confused about the 40 comes from not the 120
The interest for December 2022, January, February and March 2023 is not paid until 1 April 2023.
In the statements as at the end of 2022 it was only Decembers interest that is relevant. It had not been paid and was therefore owing as a payable.
Jan, Feb and Mar interest is an expense if the year ended December 2023.
Have you watched my free lectures on accruals?
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