Question

On November 1, Vacation Destinations borrows $1.47 million and issues a six-month, 7% note payable. Interest is payable at maturity. Record the issuance of the note and the appropriate adjusting entry for interest expense at December 31, the end of the reporting period. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field. Do not round intermediate calculations. Enter your answers in dollars, not in millions. Round your answers to the nearest dollar amount.)

Answer 1

Vacation Destinations

1. Journal Entry for issuance of the note:

Debit Cash Account $1.47 million

Credit 7% Notes Payable $1,47 million

To record the issuance of a six-month note payable.

2. Adjusting Journal Entry to record Interest Expense at December 31:

Debit Interest Expense $17,150

Credit Interest Payable $17,150

To record the interest expense for 2 months.

Step-by-step explanation:

1. Calculation of Interest Expense

$1,470,000 x 7% = $102,900 for one year

2. For a month = $102,900/12 = $8,575

3. November and December = $17,150 ($8,575 * 2)

4. Interest Expense is spread evenly. Since the interest rate is usually per annum, its calculation is adjusted to take care of the two months in the current accounting period. This is in line with the accrual concept and matching principle. These recognize expenses and revenue not on a cash basis but on an accrual basis.