Question

Notes Payable (current liabilities) Date Principal Interest Time* (P+1) Maturity Value** Interest Accrued** to 12/31 Interest Expense** from 1/1 to Maturity 9/1 $100,000 8% 9 months **Formulas *Maturity Date $25,000 6.45% 60 days 10/16 **Formulas *Maturity Date $9,800 4.67% 45 days 12/20 **Formulas *Maturity Date 12/31 Adjusting entry Payment of the 12/20 note on its maturity date: Payment of the 9/1 note on its maturity date: Date Date

Please fill this out and explain how to do this. Thanks

Answer 1

Ans. Herein formula to calculate the Interest Expense is multiplying interest rate to principal amount to determine the annual interest expense. Divide this determined amount by no. of months or days basis its maturity to find maturity interest amount. For monthly or yearly closing same is applied but no. of days or month will be taken till date of closing.

For 9/1: Interest from 9/1 to Maturity: $100000*8%*9/12= $6000 & Interest Accrued till 12/31 will be $100000*8%*4/12= $2667

For 10/16: Interest from 10/16 to Maturity 12/14: $25000*6.45%*60/365= $260.41 & same will be Interest Expense for the year. Because its maturity date will be 12/14.

For 12/20: Interest from 12/20 to Maturity: $9800*4.67%*45/365= $56.42 & Interest Accrued till 12/31 will be $9800*4.67%*11/365= $13.79

Adjusting Entries on 12/31 will be for $2667+$13.79= $2680.79 by debiting Interest Account and crediting Outstanding Interest Account.

Interest Account--------Dr $ 2680.79

To Interest Outstanding Account $2680.79

Payment Entry of 12/20:

Interest Account-------------------------------Dr. $42.63

Outstanding Interest Account--------------Dr. $13.79

Lender Account--------------------------------Dr. $9800

To Cash/Bank Account $9856.42

Payment Entry of 9/1:

Interest Account-------------------------------Dr. $3333

Outstanding Interest Account--------------Dr. $2667

Lender Account--------------------------------Dr. $100000

To Cash/Bank Account $106000