Chapter 11, Problem 1QC

On January 1, 2016, a business borrowed $18,000 on a five-year, 5% note payable. At December 31, 2016, the business should record

a. interest payable of $900.

b. note receivable of$18,000.

c. cash payment of $18,000.

d. nothing. (The note is already on the books.)

To determine

Interest payable on notes: The cost of debt which is payable on the face value of the note is called interest payable on notes.

To identify: The correct answer by solving the interest payable on notes payable as on December 31, 2016.

Answer to Problem 1QC

(a) Interest payable of $900

Explanation of Solution

Calculate interest payable on notes payable as on December 31, 2016, if principal amount of note is $18,000 and interest rate is given as 5%.

$\begin{array}{c}\text{Interest payable}=\text{Principal amount}\times \text{Rate}\times \text{Time}\\ =\$18,000\times 5\%\times 1year\\ =\$900\end{array}$

Note: The note is borrowed on January 1, 2016. Hence, at December 31, 2016, it is completed the period of 1 year.

Conclusion

Hence, options (b), (c), and (d) are incorrect and option (a) is the correct answer.