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21 August, 16:45

During the year, Calabash Clinic made a $50,000 cash payment toward its bank loan, which it had previously recorded; $40,000 was for principal, and $10,000 was to pay the full amount of interest due. What is the best way for this transaction to be recorded?

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  1. 21 August, 19:46
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    Dr Interest Payable $10,000

    Cr Notes Payable $40,000

    Cr Cash $50,000

    Explanation:

    When the loan was raised the entry was:

    Dr Cash $40,000

    Cr Notes Payable $40,000

    The interest on this loan was accounted for:

    Dr Interest Expense $10,000

    Cr Interest Payable $10,000

    So the correct entry for paying interest and principal amount would be:

    Dr Interest Payable $10,000

    Cr Notes Payable $40,000

    Cr Cash $50,000
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