Question

C.S. Lewis Company had the following transactions involving notes payable.

Answer 1

Answer:

July 1, 2014:

Debit Cash                                         $50,000

Credit Note payable                          $50,000

(To record note payable - 9-month, 8% note)

Nov. 1, 2014:

Debit Cash                                         $60,000

Credit Note payable                          $60,000

(To record note payable - 3-month, 6% note)

Dec. 31, 2014:

Debit Interest expense                       $2,000

Credit Interest payable                       $2,000

(To record 6 months interest payable on 9-month, 8% note)

Debit Interest expense                          $600

Credit Interest payable                          $600

(To record 2 months interest payable on 3-month, 6% note)

Feb. 1, 2015:

Debit Note payable                            $60,000

Debit Interest payable                             $900

Credit Cash                                         $60,900

(To record payment of principal & interest to Lyon County State Bank)

Apr. 1, 2015:

Debit Note payable                           $50,000

Debit Interest payable                         $3,000

Credit Cash                                        $53,000

(To record payment of principal & interest to First National Bank)

Explanation:

Note is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

Interest expense on the note is calculated as: Principal x Interest Rate x Time

First National Bank Note:

The total interest expense is $50,000 x 8%/12 x 9 months = $3,000.

Monthly interest expense is therefore $3,000 / 9 months = $333.33.

Total interest as at December 31, 2014 (July 1 - Dec 31): $333.33 x 6 months = $2,000.

Lyon County State Bank Note:

The total interest expense is $60,000 x 6%/12 x 3 months = $900.

Monthly interest expense is therefore $900 / 3 months = $300.

Total interest as at December 31, 2014 (Nov. 1 - Dec 31): $300 x 2 months = $600.