Question

Keesha Co. borrows $180,000 cash on November 1 of the current year by signing a 180-day, 7%, $180,000 note.

1. On what date does this note mature?
2. & 3. What is the amount of interest expense in the current year and the following year from this note?
4. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest on December 31, and (c) payment of the note at maturity.

Answer 1

Keesha Co. borrows $180,000 cash on November 1 of the current year by signing a 180-day, 7%, $180,000 note.

Calculation of Date on which the Note matures:

180 Days Starts from November 1

So, 30 Days of November

       31 Days of December

       31 Days of January

       28 Days of February

       31 Days of March

       29 Days of April

180 days ends on 29^th Day of April. So, APRIL 29^th is the maturity Date.

Calculation of amount of Interest Expense:

Interest Expense = (Amount Borrowed * Rate of Interest) / 100

Current Year Interest Expense = ($180,000 * 7 * 61 days)/ 180 * 100

                                                  = $ 4,270

30 Days of November & 31 Days of December = 61 days (30+31)

Following Year interest expense = ($180,000 * 7 * 119 days)/ 180 * 100

                                                    = $ 8,330

Total 180 days less 61 days = 119 days.

Journal Entries:

On issuance of Note:

Bank Account Dr.                             $ 180,000

       To Payables Account Cr.                                     $ 180,000

(Being Liability booked on receipt of borrowings)

Accrual of interest on December 31:

Interest Expense Account Dr.                    $ 4,270

                   To Payables Account Cr.                        $ 4,270

(Being Interest accrue on Borrowings)

Payment of Note at Maturity:

Interest Expense Account Dr.                    $ 8,330

                   To Payables Account Cr.                        $ 8,330

(Being Interest accrue on Borrowings)

Payables Account Dr.                                  $ 192,600

                   To Bank Account Cr.                                   $ 192,600

(Being Payment made to payables along with Interest)

Statement of Profit & Loss Account Dr.        $ 12,600

                    To Interest Expense Account Cr.                $ 12,600

(Being Interest Expense charged to profit and Loss Account)

Note: Here Payables means Creditor from whom Borrowings are taken.