Question

ABC Co. lends DEF Co. $30,000 with 6% on October 1, 2019. The note is due on September 30, 2020. Both companies use December 31 as their fiscal year-end.

Please make all journal entries for ABC Co. assuming

a. The note is an interest bearing note

b. The note is a non-interest bearing note

Please make all journal entries for DEF Co. assuming

c. The note is an interest bearing note

d. The note is a non-interest bearing note

Answer 1

a. Journal entries for ABC Co. assuming the note is an interest bearing note:

Date	Account	Debit	Credit
10-01-2019	Note Receivable	$30,000
	Cash		$30,000
	To record note received and loan given
12-31-2019	Interest Receivable	$450
	Interest Income ($30,000 * 6% * 3/12)		$450
	To record accrued interest
09-30-2019	Cash	$31,800
	Interest Income ($30,000 * 6% * 9/12)		$1,350
	Interest Receivable		$450
	Note Receivable		$30,000
	To record payment received

b. Journal entries for ABC Co. assuming the note is a non-interest bearing note:

Date	Account	Debit	Credit
10-01-2019	Note Receivable	$30,000
	Cash		$28,302
	Unearned interest revenue		$1,698
	To record note received and loan given
12-31-2019	Unearned interest revenue	$425
	Interest Income ($1,698 * 3/12)		$425
	To record accrued interest
09-30-2019	Cash	$30,000
	Unearned interest revenue	$1,273
	Interest Income ($1,698 - $425)		$1,273
	Note Receivable		$30,000
	To record payment received

For non interest bearing notes, we discount the face value of note. The present value of the note is the cash received.

PV of note = $30000 / (1 + 0.06) = $28,302

c. Journal entries for DEF Co. assuming the note is an interest bearing note:

Date	Account	Debit	Credit
10-01-2019	Cash	$30,000
	Note Payable		$30,000
	To record note payable and loan received
12-31-2019	Interest Payable	$450
	Loan from ABC		$450
	To record accrued interest
09-30-2019	Note Payable	$30,000
	Interest Payable	$450
	Interest Expense	$1,350
	Cash		$31,800
	To record payment

d. Journal entries for DEF Co. assuming the note is a non-interest bearing note:

Date	Account	Debit	Credit
10-01-2019	Cash	$28,302
	Discount on note payable	$1,698
	Note Payable		$30,000
	To record note payable and loan received
12-31-2019	Interest expense	$425
	Unearned interest expense		$425
	To record accrued interest
09-30-2019	Note Payable	$30,000
	Interest expense	$1,273
	Unearned interest expense		$1,273
	Cash		$30,000
	To record payment received