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Which of the following correctly records the repayment of a loan of $10,000 plus outstanding interest $500?
(A) Assets – $10.500, Capital – $10,500
(B) Assets + $10,500, Liabilities + $10,500
(C) Assets – $10,500, Liabilities – $10,000, Expenses + $500
(D) Assets – $10,500, Liabilities – $10,500
Answer is “C”.
I did ‘D’. Can you please explain why not D but C.This is a loan to the company that is to be rapaid.
If there were no interest, cash of 10,000 would leave the company (the asset of cash reduces by 10,000) and the liability is extinguished (Liabilities down 10,000).
When interest is paid, cash goes down (asset down by 500) and this represents an expense, not the repayment of the principal (expenses up 500).
D could have been correct if there had first been a double entry that charged interest of 500 as an expense and increased the liability to 10,500. Then all of the liability (principal plus interest) would be paid off with 10,500 cash.
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