Detailed Answer
Correct answer: (C)
a debit to Interest Payable for $2,000
-Interest is calculated by multiplying the loan's principal multiplied by the annual interest rate multiplied by the time period during which interest accrued
**Remember: all interest rates are annual interest rates unless designated otherwise
-this notes generates 8% interest only if it is outstanding the entire year
-On Dec 31st, 5 months of interest was properly accrued; an adjusting entry was recorded for (i) Interest Expense and (ii) interest payable for accrued interest:
(60,000 8% 5/12)
=$2,000
-On the due date (one month after the start of the next year) an additional one month of interest expense would need to be recognized and paid
(60,000 8% 1/12)
=$400
-Both the interest payable that was accused on Dec. 31st and the interest expense that accrued during the first month of the second calendar year need to be paid when the note is due swell as the note's principal must also be paid.
Debit: Notes payable for $60,000
Debit: Interest payable for $2,000
Debit: Interest Expense for $400
Credit: Cash for $62,400
