Question

Madison company issued an interest-bearing note payable with a face amount of $31,200 and a stated interest rate of 8% to the metropolitan bank on august 1, year 1. the note carried a one-year term. based on this information alone, the amount of total liabilities appearing on madison's year 1 balance sheet would be:

Answer 1

Answer:

Current liabilities $32,240

• Note payable $31,200
• Accrued interest - note payable $1,040

Explanation:

The adjusting journal entry made in December 31 is:

Dr Interest expense 1,040

    Cr Accrued interest - note payable 1,040

the amount of accrued interest = principal x interest x time = $31,200 x 8% x 5/12 = $1,040

Accrual accounting system requires that companies recognize both revenues and expenses during the accounting periods that they actually occur, not when they are collected or paid.

Reported liabilities:

Current liabilities $32,240

• Note payable $31,200
• Accrued interest - note payable $1,040

Answer 2

Answer:

Total Liability will be $32,240.

Explanation:

Interest Bearing note requires interest payment on the face value of the note outstanding. In this Question The bond Issued on August 1, with face value of $31,200 and with interest of 8% annually.

At the time of issuance a liability of $31,200 was recorded. Assuming the year end date is December 31, Year 1, Interest of 5 month has been accrued and it should also be recorded. As there is no evidence that the interest has been paid so, we will also record this accrued interest as a liability.

Journal Entry will be as follow

Dr. Interest Expense (31,200 x 8% x 5/12)  $1,040

Cr. Interest Payable Liability                        $1,040

Total Liability will be $32,240 ($31,200 + $1,040).