Question

Moss County Bank agrees to lend the Cullumber Company $695000 on January 1. Cullumber Company signs a $695000, 6%, 9-month note. What entry will Cullumber Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30

Answer 1

The interest on notes is calculated as follows

Interest payable = Face value of bonds * Interest rate * (Time of maturity / 12 months)

= $695,000 * 6% * 9/12

=$31,275

Cullumber company will pay the face value of the notes as the notes are payable at par, along with interest rate of 6% for the period of 9 months. This will result in outflow of cash, thereby crediting cash account. The liability on account of notes payable and interest payable will be settles, thereby debiting the payable account

General Entry

Date Account Title and Explanation Debit Credit

30 Sep. Notes payable $695,000

Interest payable $31,275

Cash $726,275

(To record the amount to be paid at maturity)