Question

C.S. Lewis Company had the following transactions involving notes payable.

July 1, 2014		Borrows $50,000 from First National Bank by signing a 9-month, 8% note.
Nov. 1, 2014		Borrows $60,000 from Lyon County State Bank by signing a 3-month, 6% note.
Dec. 31, 2014		Prepares adjusting entries.
Feb. 1, 2015		Pays principal and interest to Lyon County State Bank.
Apr. 1, 2015		Pays principal and interest to First National Bank.

Prepare journal entries for each of the transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

Date Account Titles and Explanation Debit Credit July 1, 2014 Nov. 1, 2014 Dec. 31, 2014 Adjusting entry for First National Bank note.) Dec. 31, 2014 (Adjusting entry for Lyon County State Bank note.) Feb. 1, 2015 Apr. 1, 2015

Answer 1

Concepts and reason

Notes: Notes can be termed as promissory notes issued by an entity for an amount to be paid in future. Notes payable or simply notes are shown as a liability in the books since a fixed amount is to be paid on a certain date.

Types of Notes: Notes can become due anytime from the balance sheet date. The notes becoming due within a period of one year from the balance sheet date are termed as short-term notes and are shown under current liabilities. Similarly, the notes becoming due after one year are treated as long-term notes and are shown under non-current liabilities.

Fundamentals

Accounting for Notes: While issuing notes for cash, the issuer debits cash along with a credit to notes payable account. Notes can be issued on purchase of an asset or acquisition of loan etc. Thus, a credit to notes payable is made when such notes are issued.

Interest on Notes: Notes generally carry a fixed percentage of interest. This amount of interest is payable frequently during the term of the notes. The amount that has occurred but has not been paid as of a balance sheet date is referred to as accrued interest. Under accrual basis of accounting, the accrued interest is recorded in the books as soon as it has occurred. It is done by debiting the interest expense account and a credit is given to interest payable account.

July 1, 2014: The company borrows $50,000 from first national bank by signing a 9-month, 8% note. Prepare the entry as shown below:

Prepare the entry as shown below to record the issue of notes against amount borrowed from bank.

Prepare the entry as shown below to record the interest expense accrued:

Prepare the entry as shown below:

Prepare the entry as shown below:

Ans:

Answer 2

why is that interest expense equals to half of the interest payable?