Question

December 18, 2017. Waren Sports Supply borrowed $60,000 from First American Bank and Trust by issuing a two-year note payable with a stated annual interest rate of 5%.$60,000 was received from the bank and deposited.

Waren's Year-End procedures for 2017.

Interest Expense. Interest on loans is paid annually on the anniversary of the note. Interest accruals are calculated using a 365-day year with the day after the note was made counting as the first day.

Make a journal entry for Interest Expense following year-end procedures.

Answer 1

The note is issued on 18/12/2017. Since the year ends on 31/12/2017, the gap between the dates is 13 days.

Interest calculation should be made on 13 days.

Interest = Note amount × Rate × Days in proportion

            = 60,000 × 5% × (13 / 365)

            = 3,000 × 13 / 365

            = 107 rounded.

Journal

Date	Account titles and explanation	Ref.	Debit	Credit
31/12/2017	Interest expense		$107
	Interest payable			$107
	To record accrued interest on note at 5%, year end.

Explanation: interest expense is debit, since this is to be charged in the income statement. Interest payable is credit, since this is a liability item in the balance sheet.