Question

On july 1, rainbow painting service borrows money from eighth national bank on a 8-month, $40,000, 5% note. interest and principal is all due on february 28. assuming any prior monthly journal entries were not made, what journal entry must rainbow painting service make on december 31 before financial statements are prepared?

Answer 1

Given:
July 1 borrowed money from eight national bank on 8-month, 40,000, 5% note.
Interest and principal is all due on February 28 
No journal entries were made. 

Recognizing cash and notes payable.
                               Debit     Credit
Cash                      40,000
  Notes Payable                   40,000

Interest on Notes payable
Interest Expense      1,333
   Interest Payable                   1,333

Recognizing interest owed but not yet paid.

40,000 * 5% * 8/12 = 1,333

On February:
Notes Payable       40,000
Interest Payable       1,333
    Cash                                 41,333