On November 30, 2016, ABC borrowed $40,000 from American National Bank by issuin

Question

On November 30, 2016, ABC borrowed $40,000 from American National Bank by issuing an interest-bearing note payable. This loan is to be repaid in three months (on February 28, 2017), along with interest computed at an annual rate of 9%.   The entry made on November 30 to record the borrowing was: Dr Cash 40,000 Cr Notes payable 40,000 On February 28, 2017 ABC must pay the bank the amount borrowed plus interest.   Assume the beginning balance for Notes Payable is correct. Interest through 12/31/16 must be accrued on the $40,000 note. On November 30, 2016, ABC borrowed $40,000 from American National Bank by issuing an interest-bearing note payable. This loan is to be repaid in three months (on February 28, 2017), along with interest computed at an annual rate of 9%.   The entry made on November 30 to record the borrowing was: Dr Cash 40,000 Cr Notes payable 40,000 On February 28, 2017 ABC must pay the bank the amount borrowed plus interest.   Assume the beginning balance for Notes Payable is correct. Interest through 12/31/16 must be accrued on the $40,000 note.

Explanation / Answer

Journal Entry Date Account Title & Explanation Debit Credit 31-Dec-16 Interest Expense $300.00 Interest Payable $300.00 To Record Accrued Interest 28-Feb-17 Note Payable $40,000.00 Interest Payable $300.00 Interest Expense ($40000*9%*2/12) $600.00 Cash $40,900.00 To record Note Repaid with interest in 3 month Working Note Amount Of Borrowing= $40000 Term=3 Month Interest Rate=9% Accrued Interest on Dec 31, 2016= $40000*9%*1/12=$300

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