Question

A business issued a 45-day, 6% note for $210,000 to a creditor on account. Journalize the entries to record (a) the issuance of the note on January 1 and (b) the payment of the note at maturity, including interest. Assume a 360-day year. Refer to the Chart of Accounts for exact wording of account titles.

Answer 1

Concepts and reason

Note payable:

Note payable is a liability. It is a written promissory note issued for the amount to be paid by the person who issues it. In general, it is issued to purchase inventory or an asset. The company can take loan by issuing a promissory note.

Accounts payable:

Accounts payable is a current liability which is payable to the suppliers for the purchases made on credit.

Fundamentals

Journal entries: Journal entry is the first step to record any transaction in the books of accounts. Recording financial transaction in a journal book in the form of an entry is known as journalizing.

Journal entries are prepared by using three rules of accounting standards, they are as follows:

The rule is: Debit the receiver and Credit the giver.

The rule is: Debit what comes in and Credit what goes out.

The rule is: Debit the Expense and Credit the Income.

Interest: Interest bearing notes are often paid off at different accounting periods; therefore, the interest income/expenses incurred during the accounting period must be recognized, even though the payment is not due. Accrued interest expense to be recorded in the period in which it was incurred but not paid.

Interest is calculated by multiplying the principle amount with the rate of interest and fraction of months/days. A fraction of months is calculated by dividing number of months the interest is to be calculated with 12 months. A fraction of days is calculated by dividing number of days interest is to be calculated with 360 days.

$Interest{\rm{ amount = }}\left( {\Pr incipal{\rm{ amount}} \times {\rm{interest rate}} \times \frac{{{\rm{No}}{\rm{. of days of note}}}}{{360}}} \right)$

a)

Record the journal entry for purchase of raw materials as follows:

b)

Record the journal entry for payment of note on the maturity date.

Working Note:

Compute the amount of interest that is to be paid on the note:

$\begin{array}{c}\\Interest{\rm{ amount = }}\left( {\Pr incipal{\rm{ amount}} \times {\rm{interest rate}} \times \frac{{{\rm{No}}{\rm{. of days of note}}}}{{360}}} \right)\\\\ = \left( {\$ 210,000 \times 6\% \times \frac{{45}}{{360}}} \right)\\\\ = \$ 1,575\\\end{array}$

Thus, the entry is to debit the 6% Notes payable account for $210,000 and interest expense account for $1,575; credit the cash account for $211,575.

Ans: Part a

Part b