Question

Sheffield borrowed $701000 on October 1, 2017 and is required to pay $721000 on March 1, 2018. What amount is the note payable recorded at on October 1, 2017 and how much interest is recognized from October 1 to December 31, 2017?

Answer 1

On October 01, 2017

The amount actually borrowed that is $ 701,000 will be recorded as liability/note payable on october 01, 2017. The following accounting entry will be passed

Debit Cash Asset $ 701,000

Credit Note payable $ 701,000

Interest recognized from October 1 to December 31, 2017

The premium amount paid on redemption will be recorded as interest over the period of time. The interest amount is

Interest = 721,000 -701,000 = $ 20,000

So this above calculated expense will be recognized as an expense over loan period.