Question

On December 16, 2019, Carboy, Inc., borrows $120,000 cash from Third National Bank at 9 percent annual interest. The note is due in 45 days. At December 31, 2019, Carboy records any unpaid interest with an adjusting entry. On January 30, 2020, Carboy pays the principal and interest owed on the bank note. Prepare the January 30 entry by Carboy for the payment (maturity) of the note plus interest by selecting the account names from the drop-down menus and entering the dollar amounts in the debit or credit columns.

Answer 1

Answer:

See explanation section.

Explanation:

Carboy records an adjusting entry at December 31, 2019. The journal entry is -

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.

Since there is an interest due of 450, interest payable becomes debit as the payment is done. The same as for notes payable.