Question

22. On November 1, 2021, Jory Laundry signed a $100,000, 9%, six-month note payable with the amount borrowed plus accrued interest due six months later on May 1, 2022. Jory Laundry records the appropriate adjusting entry for the note on December 31, 2021. In recording the payment of the note plus accrued interest at maturity on May 1, 2022, Jory Laundry would:

A) Debit Interest Payable, $3,000

B) Debit Interest Expense, $1,500

C) Debit Interest Payable, $1,500

D) Debit Interest Expense, $4,500

Answer 1

At the time of recording the payment of the note plus accrued interest at maturity on May 1, 2022, Jory Laundry would:

Answer:

Debit Interest Payable $1,500 (Option C)

Working Note:

On $100,000, 9% Six Month Note will have interest for 6 month will be:

$100,000 * 9/100 = $ 4,500 for 6 months

In the question it is mention that Note singed on November 1, 2021 but same was recorded by Jory Laundry on December 31, 2021 with appropriate adjusting entry. That means Interest Expenses has been recorded by Jory Laundry for 2 months i.e. from November 1, 2021 to December 31, 2021.

So interest expenses for 2 month is = $ 4,500/6*2 = $ 1,500

Accounting entry passed by Jory Laundry on December 31, 2021 for Notes payable & Interest Expenses is:

1) Debit Bank Account $100,000

Credit Notes Payable $100,000

(Notes Payable recorded)

2) Debit Interst Expenses $1,500

Credit Interest Payable $ 1,500

(Adjustment entry for interest expenses)   

On May 1, 2020 at the time of repayment accounting enrtry is:

Debit Notes Payable Account $100,000

Debit Interest Payable $1,500

Debit Interest Expenses $3,000 ($4,500 - $1,500)

Credit Bank Account $104,500

(Repayment of Notes along with interest accrued for 6 months)