Question

On December 16, Carboy, Incorporated, borrows $120,000 cash from Third National Bank at 9 percent annual interest. The note is due in 45 days. At December 31, Carboy records any unpaid interest with an adjusting entry. On January 30 of the next year, Carboy pays the principal and interest owed on the bank note.

Answer 1

Since there is an interest due of 450, interest payable becomes debit as the payment is done. The same as for notes payable. Carboy records an adjusting entry at December 31, 2019.

Journal Entry

Interest Expense (Debit) 450 (Note - 1)

    Interest Payable  (Credit) 450

Note - 1: Borrowing - $120,000; Interest Rate = 9%; Maturity date = 45 days.

(Assuming 360 days = 1 year).

Therefore, interest expense = ($120,000*0.09)*(15/360) = $450.

Since the maturity date is 45 days, from December 16 to December 31, it should be 15 days. And the maturity date should be January 30, 2020.

The journal entry to record the interest plus principal paid -

Date          Particulars               Debit        Credit

Jan-30, 2020 Interest Expense             900

           Interest payable              450

           Notes Payable            120,000

                   Cash                           121,350

The interest expense for this month to be payable = $(120,000*0.09)/12 = $900.

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