Question

On April 12, Hong Company agrees to accept a 60-day, 6%, $6,900 note from Indigo Company to extend the due date on an overdue account. What is the journal entry that Indigo Company would make, when it records payment of the note on the maturity date

Answer 1

Answer:

Debit notes Payable $6,900

Debit interest expense $69

Credit   cash                               $6,969

Explanation:

The interest amount payable on maturity is $6900*6%*2/12=$69

The actual principal remains at $6900

The appropriate entries would to debit notes payable with $6,900 and interest expense with $69 while the credit of $6969 goes to cash account representing an outflow to settle the obligation.

The rationale for this is that settle of an obligation would require debit the payable account.