On November 1, Alan Company signed a 120-day, 9% note payable, with a face value of $60,000. Alan made the appropriate year-end accrual. What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made? (Use 360 days a year.)

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BlackTom AI · Accepted Answer

We start by identifying the key facts of the scenario and the timing of the accruals. A 120-day note with face value 60,000 and 9% annual interest accrues interest over time at 9% per year. Using a 360-day year, the interest for the full 120 days would be 60,000 × 0.09 × (120/360) = 1,800. However, the year-end accrual (Dec 31) only covers the portion of interest that has accrued up to that date. From Nov 1 to Dec 31 is 60 days, so the accrual at year-end would be 60,000 × 0.09 × (60/360) = 900. Therefore, by March 1, when the note is paid, the company must settle the principal of 60,000 plus the total interest accrued (1,800), but the accounting entries would already have recorded the 900 accrued by year-end as Interest Payable, with the expense recognized at that time. On March 1, you clear the existing Interest Payable for 900 and also recognize the additional 900 of interest that accrued since Dec 31, totaling 1,800 in cash outflow for interest, along with paying the principal. The proper March 1 journal entry to reflect the payment, given that no reversing entry was made, is: Debit Notes Payable 60,000; Debit Interest Payable 900; Debit Interest Expense 900; Credit Cash 61,800.

Option-by-option analysis:
- Option A: Debit Notes Payable 60,000; Debit Interest Expense 1,800; Credit Cash 61,800. This entry omits the existing Interest Payable and instead records the entire interest as an expense at payment, which double-counts the year-end accrual and ignores the liability already recognized. It incorrectly shifts all interest into Interest Expense rather than clearing the payable.
- Option B: Debit Notes Payable 60,000; Debit Interest Payable 900; Debit Interest Expense 900; Credit Cash 61,800. This correctly clears the principal (Notes Payable) and accounts for the year-end Interest Payable plus the additional interest accrued since then, totaling 1,800 of interest paid, with the cash outflow matching 60,000 + 1,800 = 61,800.
- Option C: Debit Cash 60,900; Credit Notes Payable 60,900. This entry suggests paying only 60,900 toward notes payable, which misstates both the principal and the interest components and does not reflect the 60,000 principal plus 1,800 interest correctly.
- Option D: Debit Notes Payable 61,800; Credit Interest Payable 900; Credit Interest Expense 900; Credit Cash 60,000. This entry improperly increases Notes Payable (61,800) and distributes credits oddly; it also fails to reflect the proper cash outlay and misallocates the components.
- Option E: Debit Notes Payable 60,000; Debit Interest Payable 900; Credit Cash 60,900. This records only paying off the principal plus the year-end accrued interest, leaving the remaining 900 of interest unpaid, which contradicts the total interest accrued by March 1.

In summary, the most accurate representation for the March 1 payment, given the year-end accrual and no reversing entry, is to clear the principal and the full interest due, recognizing the portion that was already accrued and the additional accrual. The balance of reasoning shows why Option B aligns with those principles.

On November 1, Alan Company signed a 120-day, 9% note payable, with a face value of $60,000. Alan made the appropriate year-end accrual. What is the journal entry as of March 1 to record the payment of the note assuming no reversing entry was made? (Use 360 days a year.)

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