Question

On September 1, 2017, Banner Co. borrowed $70,000 from the City Bank for five months at 9%. Interest was properly accrued on December 31, 2017. The payment of the note and accrued interest on the due date will cause:

Answer 1

Dr Notes payable $70,000

Dr Interest payable $2,100

Dr interest expense $525

Cr Cash ($70,000+$2100+$525) $ 72,625

Step-by-step explanation:

Firstly on 31 December 2017 ,the interest accrued on the loan should be recognized in the books as follows:

$70,000*9%*4/12=$2100

The accrued interest is debited to interest expense and credited to interest payable.

However,on due date which is 31st January 2018, one month interest must also be recognized $70,000*9%*1/12=$525

The notes payable must debited with the face value in order to cancel out the obligation with cash payment