Question

Keesha Co. borrows $285,000 cash on November 1 of the current year by signing a 120-day, 10% $285,000 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

1. The given note matures on 1st March of the next year. (29 days of November + 31 days of December + 31 day of January + 28 days of February + 1st day of March) = 120 days

2. In the current year:

= Principal × rate of interest × [(number of days)/ (total number of days in a year)]

= $285,000 × 10% × (60 days/ 360 days)

= $ 4,750

( 29 days in November + 31 Days in December)

3. In the next year

= Principal × rate of interest × [(number of days)/ (total number of days in a year)]

= $285,000 × 10% × (60 days/ 360 days)

= $ 4,750

(31 Days in January + 28 days in February + 1 day in March)

We assume 360 days in a year.

4. (A) Cash A/c Dr $285,000

      To Notes payable A/c   $285,000

(Being note issued for cash)

(B) Interest expense A/c Dr $ 4,750

     To Interest payable A/c $ 4,750

(Being interest accrued)

(C) Interest expense A/c Dr           $ 4,750

    Interest payable A/c Dr            $ 4,750

    Notes payable A/c Dr               $ 285,000

            To Cash A/c                                              $2 94,500

(Being cash paid on maturity)