On December 15, 2018, Carboy, Inc., borrows $120,000 cash from Third National Bank at 9 percent annual interest. The note is due in 45 days. At December 31, 2018, Carboy records any unpaid interest with an adjusting entry. On January 30, 2019, Carboy pays the principal and interest owed on the bank note.

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carolmartelotte2020 carolmartelotte2020 · Answer 1 · 2020-12-07T14:56:03+01:00

EXPLANATION

Let's see the facts:

DECEMBER 15 ------->

Carboy borrow = $120,000

Annual interest=9%=0.09(in decimal form)

Note expiration =45 days

DECEMBER 31----------> 16 days after

carboy records an adjusting entry

Considering that 360 days =1 year

Interest expense = (borrow amount*annual interest rate in decimal)* (considering days /360)

Now, we need to calculate the compounding amount as shown as follows:

Interest Expense (debit) 450 (note-1)

Interest payable (credit ) 450

Interest expense = (borrow amount* annual interest rate in decimal*)(c)

Now , replacing terms:

Interest expense= ($120,000* 0.09)*(15/360)=$10,800*1/24= $450

Now, Since the maturity date is 45 days,

The journal entry to record the interest plus principal paid-

Date Particulars

Credit

Debit

Jan-30,2020 interest Expense

900

Interest payable

450

Notes payable

120,000

Cash

121,350

The interest expense to be payable for this month = $(120,000*0.09)/12= $900

Since there is interest due to 450, as the payment is made, the interest payable become debit.

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