Question

Keesha Co. borrows $155,000 cash on November 1, 2017, by signing a 180-day, 11% note with a face value of $155,000.

1. On what date does this note mature? (Assume that February has 28 days)

April 25, 2018.

April 26, 2018.

April 27, 2018.

April 28, 2018.

April 30, 2018.

2. & 3. What is the amount of interest expense in 2017 and 2018 from this note? (Use 360 days a year. Round final answers to the nearest whole dollar.)



4. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest at the end of 2017, and (c) payment of the note at maturity. (Assume no reversing entries are made.) (Use 360 days a year. Do not round intermediate calculations.)

Answer 1

1.

The 180-day note will mature on April 30 2018 which can be counted from 1 November 2017 as:

November 2017: 29 days

December 2017: 31 days

January 2018: 31 days

February 2018: 28 days

Marc h 2018: 31 days

April 2018: 30 days

Total         : 180 days

2.

Interest expense in 2017 = Principal x rate x time

                                            = $ 155,000 x 11% x (29 + 30)/360

                                            = $ 155,000 x 0.11 x 60/360

                                            = $ 155,000 x 0.11 x 0.166666667

                                             = $ 2,841.666667 or $ 2,842

3.

Interest expense in 2017 = Principal x rate x time

                                            = $ 155,000 x 11% x (180-60)/360

                                            = $ 155,000 x 0.11 x 120/360

                                            = $ 155,000 x 0.11 x 0.3333333

                                             = $ 5,683.333333 or $ 5,683

4.

	General Journal	Debit	Credit
(a)	Cash	$155,000
	Notes Payable		$155,000
	(Issuance of note)
(b)	Interest expense	$2,842
	Interest payable		$2,842
	(Accrual interest at the end of 2017)
(c)	Interest expense	$2,842
	Interest payable	$5,683
	Notes payable	$155,000
	Cash		$163,525
	(Payment of note on maturity)