Question

Keesha Company borrows $280,000 cash on December 1 of the current year by signing a 90-day, 8%, $280,000 note.

1. On what date does this note mature?
2. & 3. What is the amount of interest expense in the current year and the following year from this note?
4. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest on December 31, and (c) payment of the note at maturity

Answer 1

The note matures on March 1 of the following year. The interest expense in the current year is $1,867 and in the following year is $4,667. The journal entries are: issuance of note - debit cash and credit notes payable, accrual of interest on December 31 - debit interest expense and credit interest payable, payment of note at maturity - debit notes payable and interest payable, and credit cash.

Step-by-step explanation:

The maturity date of the note is 90 days from December 1 of the current year. Therefore, the note will mature on March 1 of the following year.

The amount of interest expense in the current year can be calculated using the formula: Principal x Interest Rate x Time. In this case, the principal is $280,000, the interest rate is 8%, and the time is 30 days (since the note was issued on December 1 and the current year ends on December 31). Therefore, the interest expense in the current year is:

$280,000 x 8% x (30/360) = $1,867.

In the following year, the note is still outstanding for 60 days (from January 1 to March 1). Therefore, the interest expense in the following year is:

$280,000 x 8% x (60/360) = $4,667.

The journal entries to record the issuance of the note, accrual of interest on December 31, and payment of the note at maturity are as follows:

1. Issuance of the note:
   Debit Cash $280,000
   Credit Notes Payable $280,000
2. Accrual of interest on December 31:
   Debit Interest Expense $1,867
   Credit Interest Payable $1,867
3. Payment of the note at maturity:
   Debit Notes Payable $280,000
   Debit Interest Payable $4,667
   Credit Cash $284,667