Question

On December 16, 2019, Carboy, Inc., borrows $120,000 cash from Third National Bank at 9 percent annual interest. The note is due in 45 days. At December 31, 2019, Carboy records any unpaid interest with an adjusting entry. On January 30, 2020, Carboy pays the principal and interest owed on the bank note. Prepare the January 30 entry by Carboy for the payment (maturity) of the note plus interest.

Answer 1

The January 30 entry:

Debit Interest Payable $450

Debit Interest expense $900

Debit Bank note Payable $120,000

Credit Cash $121,350

Step-by-step explanation:

Assuming 1 year interest is 360 day. The amount Interest expense Carboy, Inc. records at December 31, 2019:

($120,000 x 9% x 15)/360 = $450

The adjusting entry:

Debit Interest expense $450

Credit Interest Payable $450

On January 30, 2020, the amount of interest expense from 01 January 2020 to 30 January 2020:

($120,000 x 9% x 30)/360 = $900

Carboy pays the principal and interest owed on the bank note. The entry by Carboy for the payment (maturity) of the note plus interest:

Debit Interest Payable $450

Debit Interest expense $900

Debit Bank note Payable $120,000

Credit Cash $121,350