When a corporation pays a note payable and the related interest, which of the following journal entries is correct?

• A. Debit Notes Payable, Debit Interest Expense, Credit Cash
• B. Debit Notes Payable, Credit Interest Expense, Credit Cash
• C. Debit Interest Expense, Credit Notes Payable, Credit Cash
• D. Debit Cash, Credit Notes Payable, Credit Interest Expense

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the nature of the transaction. When a corporation pays a note payable and the related interest, it is reducing its liability (Notes Payable) and recording the expense incurred for interest (Interest Expense). Cash is credited because it is being used to settle the liability and expense.
2. Step 2: Recall the rules of debits and credits. Liabilities (Notes Payable) decrease with a debit, expenses (Interest Expense) increase with a debit, and assets (Cash) decrease with a credit.
3. Step 3: Analyze the journal entry components. To record the payment, you need to debit Notes Payable to reduce the liability, debit Interest Expense to recognize the cost of borrowing, and credit Cash to reflect the outflow of funds.
4. Step 4: Compare the options provided in the problem. The correct journal entry should match the accounting principles outlined above: Debit Notes Payable, Debit Interest Expense, Credit Cash.
5. Step 5: Verify the logic of the other options. For example, 'Debit Notes Payable, Credit Interest Expense, Credit Cash' incorrectly credits Interest Expense, which should be debited to reflect the incurred cost. Similarly, 'Debit Interest Expense, Credit Notes Payable, Credit Cash' and 'Debit Cash, Credit Notes Payable, Credit Interest Expense' do not align with the proper accounting treatment for this transaction.