Question

Travis County Bank agrees to lend Backyard Corporation $200,000 on January 1. Backyard signs a $200,000, 4%, 9-month note. Interest is due at maturity on September 30.
A company pays $18,000 in interest on notes, consisting of $12,000 interest that accrued during the last accounting period and $6,000 of interest accumulated during this accounting period but not previously accrued on the books. The journal entry for the interest payment should:

Multiple Choice

a. debit Interest Expense for $18,000 and credit Cash for $18,000.

b. debit Cash for $18,000 and credit Interest Payable for $18,000.

c. debit Interest Expense for $6,000, debit Interest Payable $12,000 and credit Cash for $18,000.

d. debit Interest Payable for $12,000, debit Accrued Interest $6,000 and credit Cash for $18,000.

Answer 1

When interest is accrued but not paid journal entry is:

	Interest expense	$12,000
	Interest payable		$12,000

Last year this entry would have been passed

This year interest expense is $6,000 so it will be debited to interest expense

and $12,000 of interest payable (last year's) will be recorded by debiting interest payable.

cash paid will be credited as the cash has been reduced.

Journal entry this year would be:

	Interest expense	$6,000
	Interest payable	$12,000
	cash		$18,000

Answer C