Question

Which of the following statements is correct regarding the adjustment to record interest accrued on a note payable? Multiple Choice Interest on the note payable is classified as an expense since it is a cost of borrowing. Interest on a note payable should be credited to Notes Payable because it increases the amount of principal to be repaid at the maturity of the note. Interest on the note payable is classified as revenue since it is an amount that can be earned on investments. Interest on the note payable will not accumulate because it is paid at the end of each year.

Answer 1

Answer:
a. Interest on the note payable is classified as an expense since it is a cost of borrowing.

Explanation:
Interest in general can be defined as “the cost of borrowing money”. Even if the company is not paying interest at the end of the year the same should be transferred to interest payable account since it the cost of borrowing and should be considered as an expense in the income statement of the year concerned. Thus, interest on note payable is classified as an expense as it is the cost of borrowing.
Interest is not credited to note payable account and thus option (B) is wrong. Interest on not payable is not a revenue but is an expense and hence option (C) is wrong. Interest on note payable is not paid at the end of the year but it accumulates and is paid along with the principle amount on maturity. Thus option (D) is wrong.