QuestionThe entry used to journalize the payment of an interest-bearing note is a. debit Cash and credit Notes Payable b. debit Notes Payable and Interest Receivable and credit Cash c. debit Notes Payable and Interest Expense and credit Cash d. debit Accounts Payable and credit Cash
Studdy Solution
STEP 1
What is this asking?
Which accounts do we need to adjust when we pay back a loan *with* interest?
Watch out!
Don't forget about the interest!
It's a crucial part of the payment.
STEP 2
1. Understand the components of a loan payment
2. Analyze the debit and credit effects
3. Identify the correct journal entry
STEP 3
Alright, awesome students!
When you pay back a loan, you're not just returning the original amount you borrowed (the **principal**).
You're *also* paying for the privilege of using that money over time, which is the **interest**!
STEP 4
Think of it like this: your **cash** is going *out* the door to the lender.
Since cash is an **asset**, and assets decrease with a **credit**, we'll **credit Cash**.
STEP 5
Now, the **Notes Payable** account represents the original loan amount.
When you pay it back, you're reducing your liability.
Liabilities decrease with a **debit**, so we **debit Notes Payable**.
STEP 6
Finally, the **Interest Expense** represents the extra money you're paying *on top of* the loan.
It's an expense for you, and expenses increase with a **debit**, so we **debit Interest Expense**.
STEP 7
Putting it all together, we need to **debit Notes Payable**, **debit Interest Expense**, and **credit Cash**.
This perfectly reflects the flow of money and the reduction of your loan obligation!
STEP 8
The correct answer is c. debit Notes Payable and Interest Expense and credit Cash.
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