Question

June 1, 2011, Sterling signs a one-year, 8% note payable for $10,000 with principle and interest due on June 1, 2012. It is Sterling's only note outstanding. On June 1, 2012 when the note is paid, Sterling debits Notes Payable and credits 10,800, the sum of principle and interest. The error is likely to be found because...

a. the bank reconciliation will be out of balance when the check clears

b. the trial balance will be out of balance by $800

c. the trial balance will show a balance in notes payable that is not normal

d. interest expense will be understated

Explanation please and please answer only if you are sure of the answer. This question is posted on Chegg from other people and the answers are different. I would like to know the reasoning behind it.

Answer 1

The answer to thos query shall be option 2nd i.e the trial balance will be out of balance by $800

the journal entry would be as follows:-

Note payable dr. $10000

Interest Expense Dr. $800

to Bank cr. $10800

If $10800 is paid interest exepnse shall also be recorded on the same date otherwise if the entry of expense is not recorded then the trial balance will not match by an amount of $800. Then on checking the same the interest expense shall be recoded correcting the trial and hence correcting the trial.