Question

On April 12, Hong Company agrees to accept a 60-day, 8%, $5,700 note from Indigo Company to extend the due date on an overdue account. What is the journal entry that Indigo Company would make, when it records payment of the note on the maturity date

Answer 1

Indigo Company would make a journal entry to debit Notes Payable for $5,700 and Interest Expense for $74.93, and to credit Cash for a total payment of $5,774.93 on the note's maturity date.

Step-by-step explanation:

When Indigo Company records the payment of the note on the maturity date, the company needs to pay both the principal amount of the note and the interest that has accrued over the 60 days. The steps for the calculation of interest are:

Interest = Principal × Interest Rate × (Days Outstanding / 365)

Interest = $5,700 × 8% × (60 / 365)

Interest = $5,700 × 0.08 × 0.1644

Interest = $74.93 (rounded to two decimal places)

The total amount to be paid at maturity will be the principal plus the interest: $5,700 + $74.93 = $5,774.93

The journal entry to record the payment on the maturity date would be:

• Debit Notes Payable $5,700
• Debit Interest Expense $74.93
• Credit Cash $5,774.93

This entry removes the liability for the note from Indigo Company's books and records the expense of the interest, while also reducing the cash by the total amount paid.

Answer 2

Interest = Principal Amount × Rate × Number of days / 365

Interest = $5,700 * 10% * 60/365

Interest = $96.70

Cash to be paid = Principal Amount + Interest

Cash to be paid = $5,700 + $96.70

Cash to be paid = $5796.70

On the date of maturity, journal entry to make the payment of note payable is given below

Date Account Title & Explanation Debit Credit

Note Payable $5,700

Interest Expense $96.70

Cash $5796.70