Question

Assume that on October 1 of this year, Southport borrowed $6.5 million cash from Wells Fargo Bank to meet short-term obligations. Southport signed an interetst-bearing note and promised to repay the $6.5 million in nine months. The annual interest rate was 5%. All interest will accrue and be paid when the note is due in nine months. Southport’s accounting period ends on December 31.

(a) Provide the journal entry to record the note on October 1, Year 1.

(b) Provbide any adjusting entry required at the end of the accounting period ending on December 31, Year 1.

(c) Provide the journal entry to record payment of the note and interest on the maturity date, June 30, Year 2.

Answer 1

1 oct (a)	Cash	6500000
	Notes payable		6500000
31 dec(b)	Interest expense	81250
	Interest payable (6500000 x 5% x 3 /12 ) (3 months oct to dec)**		81250
30 June(c)	Interest expense (6500000 x 5% x 6/12) jan to jun	162500
	Interest payable (oct to dec)	81250
	Cash ( 6500000 x 5% x 9/12) (oct to jun)		243750

** Since we use matching and accrual principal. Interest expense from october 1 to 31 drc would accrue this year and will be recorded as am expense with corresponding credit to interest payable