Question

Stellar Company borrowed $37,200 on November 1, 2020, by signing a $37,200, 9%, 3-month note. Prepare Stellar’s November 1, 2020, entry; the December 31, 2020, annual adjusting entry; and the February 1, 2021, entry. (If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when amount is entered. Do not indent manually. Record journal entries in the order presented in the problem.)

Answer 1

Step-by-step explanation:

The journal entries are shown below:

(A) Cash A/c Dr $37,200

To Notes payable A/c $37,200

(Being note is issued for cash)

(B) Interest expense A/c Dr $558

To Interest payable A/c $558

(Being accrued interest adjusted)

The interest expense would be

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

= $37,200 × 9% × (2 months÷ 12 months)

= $558

The two months is calculated from November 1 to December 31

(C) Interest expense A/c Dr $279

Interest payable A/c Dr $558

Notes payable A/c Dr $37,200

To Cash A/c $38,037

(Being cash is paid on maturity)

The computation is shown below

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

= $37,200 × 9% × (1 months÷ 12 months)

= $279

The two months is calculated from the December 31 to February 1