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Wisconsin Bank lends A Company $150,000 on November 1. A Company signs a $150,000, 3%, 4-month note. The fiscal year end of A Company is December 31. The journal entry made by A Company on December 31 is:A) DR Interest Expense $ 750; CR Cash $ 750

A.) debit interest payable and credit cash for $1,200
b.) debit interest expense and credit payable for $1,200
c.)Debit interest expense and credit cash for $1,200
d.)Debit interest payable and credit interest expense for $1,200

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Answer:

The correct answer is: Debit Interest expense $750; Credit Interest Payable $750, unfortunately, none of the options provided is correct.

Explanation:

Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

Interest expense on the notes is calculated as: Principal x Interest Rate x Time

In this case, the total interest expense is $150,000 x 3%/12 x 4 months = $1,500.

Monthly interest expense is therefore $1,500 / 4 months = $375.

Note that Wisconsin Bank would have to recognize the interest expense on a monthly basis and not recognize the whole interest expense when it becomes payable. The interest expense for the two months to the fiscal year-end would be:

Debit Interest expense ($375 x 2)                      $750

Credit Interest payable                                        $750

(Interest expense recognition on note for 2 months)

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