Question

On January 1, 2011, you borrowed $14,000 on a five-year, 9% note payable. At December 31, 2012, you should record:

- Note receivable of $14,000
- Cash payment of $14,000
- Interest payable of $1,260
- Nothing (the note is already on the books).

Answer 1

The accurate recording as of December 31, 2012, for a $14,000 note payable taken on January 1, 2011, at a 9% interest rate is an interest payable of $2,520 to account for the two years of accrued interest.

Step-by-step explanation:

The question relates to accounting for a long-term liability (a note payable) and the associated interest. On January 1, 2011, a $14,000 note payable at a 9% annual interest rate was taken. By December 31, 2012, two years of interest must be accounted for, which is $14,000 x 9% x 2 years = $2,520 total interest.

Since the question suggests that no interest has been paid yet, the correct entry would be to record an interest payable of $2,520 rather than $1,260, considering two years have passed. It is important to note that we are not recording a note receivable, as this pertains to the creditor, not the borrower; not cash payment of $14,000, because the question doesn't imply that the note was paid off; and not 'nothing', because even though the note is already on the books, the interest accrued for the period must be recorded.