Question

Keesha Co. borrows $200,000 cash on November 1, 2015, by signing a 90-day, 9% note with a face value of $200,000. 1. On what date does the note mature? (Assume that February of 2015 has 28 days.) 2. How much interest expense results from this note in 2015? (Assume a 360-day year.) 3.  How much interest expense results from this note in 2016? (Assume a 360-day year.) 4. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest at the end of 2015, and (c) payment of the note at maturity. (Assume no reversing entries are made.)

Answer 1

Concepts and reason

Notes Payable: These are the promissory notes that are issued by the company in order to raise the debt. It is a part of the current liability that is shown n the balance sheet under the head current liabilities.

Journal Entry: This is the primary recording of any transaction which is entered in the financial accounting. First of all, every transaction is put into a journal entry and from there it is posted to different accounts. Journal entry forms the basis of accounting. If a journal entry is wrong then financial books cannot provide a correct picture of the financials of the entity.

Rules of debit and credit have been followed for journalizing the various transactions and these are as mentioned below:

Debit the Receiver and Credit the Giver: It is used for personal accounts. It indicates when the organization receives something from anyone then, what is received would be debited and the giver would be credited.

Debit what comes in and Credit what goes out: It is used for real accounts. It indicates when the organization purchased or receives any asset then it would be debited and on the other side, when the asset is going out of the organization then, it would be credited.

Debit all expenses and losses, credit all incomes and gains: It is used in case of a nominal account, and according to this rule all the expenses and losses incurred by the organization would be debited and on the other side, all the incomes and gain of the organization would be credited.

Fundamentals

Accrued Liabilities: It is that part of the liability that is that has accrued during the current accounting period due to any financial transaction.

Interest payable: It is that amount that gets accrued at the end of the financial period but still remains unpaid. Its effect is that although the cash is not paid there is an obligation to pay for the interest which constitutes a liability on the part of the business.

Current Liability: These are the liabilities or obligations of the company which are expected to be paid off in a period which is less than a fiscal year. Alternatively, these are the debts of the company which is to be paid within a year.

Interest cost: It refers to the amount paid by the borrower of the funds to the lender. Interest is paid by the borrower regularly over the period of time above the principal repayment. In this, a person uses another person’s money in its business and pays interest on the same amount.  

1.

The note payable is issued for 90 days on 1^st November 2015. Hence, the note payable will mature after 90 days from 1^st November 2015 that is 31^st January 2016.

2.

Compute the interest expense using the equation as follows:

$\begin{array}{c}\\{\rm{Interest expense}} = {\rm{Face value}} \times {\rm{Periodic interest rate}} \times {\rm{Number of months }}\\\\ = \$ 200,000 \times \frac{{9\% }}{{12}} \times 2\\\\ = \$ 200,000 \times \frac{{0.09}}{6}\\\\ = \$ 3,000\\\\{\rm{ }}\\\end{array}$

Hence, the accrued interest expense for 2015 is $3,000.

3.

Compute the interest expense using the equation as follows:

$\begin{array}{c}\\{\rm{Interest expense}} = {\rm{Face value}} \times {\rm{Periodic interest rate}} \times {\rm{Number of months }}\\\\ = \$ 200,000 \times \frac{{9\% }}{{12}} \times 1\\\\ = \$ 200,000 \times \frac{{0.09}}{{12}}\\\\ = \$ 1,500\\\\{\rm{ }}\\\end{array}$

Hence, the interest expense for 2016 is $1,500.

4(a)

Pass a journal entry to record issuance of note payable as follows:

4(b)

Pass a journal entry to record accrued interest in 2015 as follows:

4(c)

Pass a journal entry to record the payment of a note payable on maturity as follows:

Ans: Part 1

The note payable will mature after 90 days from 1^st November 2015 that is 31^st January 2016.

Part 2

The accrued interest expense for 2015 is $3,000.

Part 3

The interest expense for 2016 is $1,500

Part 4a

Part 4b

Part 4c