Question

Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1. Brickyard signs a $200,000, 4%, 9-month note. Interest is due at maturity on September 30. The company’s fiscal year ends June 30 and adjusting entries are recorded at that time only. What journal entry will Brickyard make when paying the interest at maturity?

		Debit Notes Payable and credit Cash for $206,000
		Debit Interest Expense for $4,000, and credit Cash for $4,000
		Debit Interest Expense for $6,000 and Cash for $206,000
		Debit Interest Payable for $4,000, credit Interest Expense for $2,000, and credit Cash for $6,000

Answer 1

given data

brickyard sigins on note value = $ 200000

interest rate = 4%

note period = 9 months

journal entries :

maturity date of note is 30 sep

date	particulars	l/f	debit	credit
30 sep	interest payable a/c dr (w n 1)		4000
	interest expense a/c dr (wn 2)		2000
	to cash a/c			6000
	(being the intererest paid on maturity date)

working note 1 :

interest payable (6 months interest) = note value * interest rate * 6 months interest

= 200000 * 4% * (6 / 12)

= 8000 * (6 / 12)

= $ 4000

working note 2 :

interest expense a/c (3 months interest) (30 june to 30 sep) = note value * interest rate * 3 months interest

= 200000 * 4% * (3 / 12)

= 8000 * (3 / 12)

= $ 2000.

Therefore, 4th option is correct.