Havier Corporation borrows $1 million from a bank on September 1, Year 1, by signing a 6 percent, nine-month note for the amount borrowed plus accrued interest due nine months later on June 1, Year 2. Which of the following is recorded on June 1, Year 2?Multiple Choice$20,000 credit to Interest Expense$25,000 debit to Interest Payable$1,045,000 credit to Cash$1,045,000 debit to Notes Payable
Question
Havier Corporation borrows 20,000 credit to Interest Expense1,045,000 credit to Cash$1,045,000 debit to Notes Payable
Solution
The correct answer is "$1,045,000 debit to Notes Payable".
Here's the step-by-step explanation:
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The loan amount is $1 million and the interest rate is 6 percent per annum. However, the loan term is only for nine months. So, first, we need to calculate the interest for nine months.
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The interest for one year would be 60,000.
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Since the loan term is only for nine months, we calculate the interest for nine months as 45,000.
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On June 1, Year 2, the total amount due (principal + interest) would be 45,000 (interest) = $1,045,000.
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This amount is the liability of Havier Corporation and needs to be cleared off. So, it will be recorded as a debit to Notes Payable.
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Therefore, the correct answer is "$1,045,000 debit to Notes Payable".
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