Question

Entries for notes payable

A business issued a 90-day, 15% note for $87,000 to a creditor on account. Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity, including interest. Assume a 360 days in a year.

If an amount box does not require an entry, leave it blank. If required, round yours

answers to whole dollar.

Transaction

Account

Debit Credit

Answer 1

Debit Notes Payable: $83,737.5

Debit Interest Expense: $3,262.5

Credit Cash: $87,000

To journalize the entries for the issuance of the note and the payment of the note at maturity, we need to follow the steps below:

Issuance of the Note:

Debit Notes Payable: $87,000 - This increases the liability on the balance sheet, representing the obligation to pay back the creditor.

Credit Accounts Payable: $87,000 - This reflects the reduction in the accounts payable since the company issued a note in exchange for the accounts payable.

Payment of the Note at Maturity:

Debit Notes Payable: $83,737.50 - This represents the payment of the principal amount of the note. The amount is calculated as the face value of the note minus the interest.

Debit Interest Expense: $3,262.50 - This recognizes the interest expense incurred over the life of the note. The interest is calculated using the formula (Principal * Rate * Time / 360).

Credit Cash: $87,000 - This reflects the actual cash payment made to the creditor at the maturity of the note.

Answer 2

a. Debit Notes Payable= $87,000, Credit Accounts Payable= $87,000

b. Debit Notes Payable = $83,737.5, Credit Interest Expense $3,262.5, Credit Cash: $87,000

In journal, to record the issuance of the note, we will debit Notes Receivable and credit Cash or the related party's account. Also, to record the payment of the note at maturity including interest, we will debit Cash, debit Interest Expense and credit Notes Payable.

(a) The issuance of the note will be recorded as follows:

Debit Notes Payable: $87,000

Credit Accounts Payable: $87,000

(b) The payment of the note at maturity including interest will be recorded as follows

Debit Notes Payable: $83,737.5

Dedit Interest Expense: ($87,000 * 15% * (90/360)) = $3,262.5

Credit Cash: $87,000