B is corrent. Interest expense is calculated as $1,000,000 x 9% x 3/12 months = $22,500. The payment of $264,200 less $22,500 in interest is equal to $241,700, which is the amount of the payment which is applied to the principal balance of the note. Therefore, this answer is correct because the carrying value of the note on December 31 is $758,300 ($1,000,000 – $241,700)
A is incorrect because it ignores interest expense over the life of the note and incorrectly reduces the principle balance of the note by the full payment. ($1,000,000 – 264,200 = $735,800).
C is incorrect because it adjusts the payment by the interest for the enire note period. Interest to be expensed over the lif of the note is $1,000,000 x 9% = 90,000. The payment of $264,200 less $90,000 in interest is equal to $174,200, which is the amount of the payment incorrectly applied to the principle balance of the note ($1,000,000 – $174,200 = $825,800).
D is incorrect because it incorrectly reduces the principle balance of the note by 1/4 of the face value of the note. ($1,000,000/4= $250,000. $1,000,000 – $250,000 = $750,000).
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