Question

Lola Co. borrows $120,000 cash on November 1, 2015, by signing a 90-day, 9% note with a face value of $120,000.

1.) On what date does this note mature?

2.) How much interest expense results from this note in 2015?

3.) How much interest expense results from this note in 2016?

4.) Prepare journal entries to record (a) issuance of the note, (b) accrual of interest at the end of 2015, and (c) payment of the note at matutity.

Answer 1

• All working forms part of the answer
• Working for Notes and Interest, days in a year assumed to be 360 days for interest calculation.

Face Value	$120000
Issue date	01-Nov-15
Tenure/Period [days]	90
Maturity Date [29 days November + 31 days December + 30 days January]	30-Jan-16
Interest rate	9%
Annual Interest [120000 x 9%]	$10800
Interest for 90 days [10800 x 90/360]	$2700
Interest till 31 December [60 days, from 1 Nov to 31 Dec]	$1800 [2700 x 60/90]
Interest from 1 Jan to 30 Jan [30 days from 1 Jan to 30 Jan]	$900 [2700 x 30/90]

• Answers based on above working

Answer 1: Note matures on January 30, 2016

Answer 2: Interest expense in 2015 = $1,800

Answer 3: Interest expense in 2016 = $900

Answer 4:

Question (4)	General Journal	Debit	Credit
Answer (a)	Cash	$        1,20,000.00
	Notes payable		$       1,20,000.00
	(amount borrowed)
Answer (b)	Interest expenses	$              1,800.00
	Interest payable		$             1,800.00
	(interest for 60 days accrued)
Answer ( c)	Notes payable	$        1,20,000.00
	Interest expenses	$                 900.00
	Interest payable	$              1,800.00
	Cash		$       1,22,700.00
	(notes paid at maturity)