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

Step-by-step explanation:

1. The maturing date of note will be 30 January 2016

( 29 days in November + 31 Days in December and 30 Days in January)

2. The interest expense would be

On 2015:

= Principal × rate of interest × number of days ÷ (total number of days in a year)

= $200,000 × 9% × (60 days ÷ 360 days)

= $3,000

( 29 days in November + 31 Days in December)

3. On 2016:

= Principal × rate of interest × number of days ÷ (total number of days in a year)

= $200,000 × 9% × (30 days ÷ 360 days)

= $1,500

(30 Days in January)

We assume 360 days in a year.

4. (A) Cash A/c Dr $200,000

To Notes payable A/c $200,000

(Being note is issued for cash)

(B) Interest expense A/c Dr $3,000

To Interest payable A/c $3,000

(Being accrued interest adjusted)

(C) Interest expense A/c Dr $1,500

Interest payable A/c Dr $3,000

Notes payable A/c Dr $200,000

To Cash A/c $204,500

(Being cash is paid on maturity)