Question

Dedmon Co. , whose fiscal year ends December 31, borrowed $20,400 on September 1, 2016, issuing a 10%, ten-month note payable with interest due at maturity. When the note matures on June 30, 2017, Dedmon will write a journal entry that includes a debit to interest payable of $___________

Answer 1

Even though interest is due on maturity, Dedmon Co is required to account for the accrued interest at the end of the fiscal year in which it borrowed the funds

So, interest for the period September 1,2016 to December 31,2016 (4 months)

= Principal x Rate x Time / 12 months

= $20,400 x 10% x 4 /12

= $680

As this amount is not yet due, it will be accounted as interest payable in the books of accounts of Dedmon Co

Journal Entry

Interest Expenses       $680

       Interest Payable       $680

On maturity (June 30,2017), the amount remaining in interest payable account will be debited and Bank / Cash will be credited in order to account for payment of interest accrued in previous year (2016)

So, Interest payable will be credited for $680