QUESTION 2: On November 1, 2018, Sportswear, Inc \"Sportswear\") signs a note pa

Question

QUESTION 2: On November 1, 2018, Sportswear, Inc "Sportswear") signs a note payable in the amount of S50,000. The note is a 90-day note, with a 12% interest rate. (1) What is the TOTAL interest that Sportswear will pay over the life of the note? Show calculations. If Sportswear makes monthly adjusting entries, how November (2) much interest expense is accrued on 30, 2018? Journalize the entry. Show all calculations. (3) If Sportswear makes annual adjusting entries, how much interest expense is accrued on 31, 2018? Journalize the entry. Show all calculations. December

Explanation / Answer

Solution:

Part 1 --- Total Interest over the life of the note

Life of the Note = 90 days

Note Value = $50,000

Rate of Interest = 12%

The Total Interest over the life of the note (Assuming 360 days in a year)

Total Interest = Note Value x Rate of Interest x Life of Note / 360 Days in a year

= $50,000*12%*90/360

= $1,500

The Total Interest over the life of the note (Assuming 365 days in a year)

Total Interest = Note Value x Rate of Interest x Life of Note / 365 Days in a year

= $50,000*12%*90/365

= $1,479.45

Part 2 --- Accrued Interest Expense on Nov 30, 2018

Interest Expenses for 30 days is accrued on Nov 30, 2018

Interest Expense (Assuming 360 days in a year) = $50,000*12%*30/360 = $500

Date

General Journal

Debit

Credit

Nov'30, 2018

Interest Expense

$500

Interest Payable

$500

Part 3 – Interest Expense Accrued on Dec 31, 2018

Total Number of days of Notes Payable = 90 days

Number of days till Dec 31, 2018 = 30 days of Nov and 31 days of Dec = 61 days

Assuming 360 days in a year

Accrued Interest Expense on Dec 31, 2018 = $50,000*12%*61 days /360 days = $1,016.67 or $1,017

Date

General Journal

Debit

Credit

Dec31, 2018

Interest Expense

$1,017

Interest Payable

$1,017

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Date

General Journal

Debit

Credit

Nov'30, 2018

Interest Expense

$500

Interest Payable

$500

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