Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

Keesha Co, borrows $255,000 cash on November 1, 2015, by signing a 90-day, 12% n

ID: 2447558 • Letter: K

Question

Keesha Co, borrows $255,000 cash on November 1, 2015, by signing a 90-day, 12% note with a face value of $255.000. 1. On what date does this note mature? Assume a 365 day year. 2-3. What is the amount of interest expense in 2015 and 2016 from this note? (Use 360 days a year. Do not round intermediate calculations.) 4. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest at the end of 2015, and (c) payment of the note at maturity. (Use 360 days a year. Do not round intermediate calculations.)

Explanation / Answer

Answer:

1)

Maturity Date = Issue Date + 90 days = Nov 1, 2015 + 90 days = January 30, 2016.

No. of days is calculated from next day of Issue Date i.e. from Nov 2, 2015

2-3) Calculation of Interest Amount

Total Interest Amount for 90 days = $255,000 x 12% x 90 /360 = $7,650

Interest Amount to be recorded:

As on Dec 31, 2015 for 60 days = $7,650 x 60 / 90 = $5,100

As on January 30, 2016 for 30 days = $7,650 x 30 /90 = $2,550

Interest Expenses in 2015 = $5,100

Interest Expenses in 2016 = $2,550

4) Journal Entries

(a) On issuance of note

Cash / Bank A/c …………..Dr. $255,000

      To 12% Note A/c                                $255,000

(Being 12% note for $255,000 issued)

(b) Accrual of Interest at the end of 2015

Interest Expenses (P&L A/c) …..Dr.. $5,100

        To Accrued Interest Payable on Note              $5,100

(Being accrued interest for 60 days on 12% note is recorded)

(C) Payment of the note at maturity

12% Note………………Dr.   $255,000

      TO Cash/Bank A/c                       $255,000

(Being 12% note paid on marurity)