Final answer:
On July 16, MCC Company records the note payable of $2,000. On July 31, interest for half a month is recorded as an expense, and on August 15, the note and total interest are paid.
Step-by-step explanation:
The subject of the question involves the creation of journal entries related to borrowing by a company and involves understanding the principles of accounting, specifically in relation to notes payable and interest accrual. On July 16, the MCC Company signs a $2,000, 30-day, 12% note as a settlement of an account payable. The journal entry on this date would be:
- Debit Accounts Payable $2,000
- Credit Notes Payable $2,000
This entry reflects the replacement of the account payable with a notes payable.
On July 31, assuming a month-end closing, the interest incurred from July 16 to July 31 would need to be recorded, even though the note is not due until later. The interest for 15 days can be calculated as follows: ($2,000 × 12% annual rate × 15/365 days), which equates to approximately $9.86. The journal entry would be:
- Debit Interest Expense $9.86
- Credit Interest Payable $9.86
This entry records the interest cost of the note for the month of July.
Finally, on August 15, the note is due, and the total interest incurred for the entire 30 days must be paid along with the note principal. The total interest is calculated as ($2,000 × 12% annual rate × 30/365 days), which equates to approximately $19.73. The journal entries on this date would be:
- Debit Notes Payable $2,000
- Debit Interest Payable $9.86
- Debit Interest Expense $9.87
- Credit Cash $2,019.73
These entries clear the notes payable, recognize the remaining interest expense for August, and reduce cash for the full settlement payment of the note and interest.