Question

Steve has a note payable that is due in seven months. He borrowed $80,000 with a...

Steve has a note payable that is due in seven months. He borrowed $80,000 with a 6% interest rate on September 1, 2018. The note will be due on June 1, 2019. He already recorded the journal entry on September 1, 2018, he needs your help in calculating the interest accrual on December 31, 2018 and the full entry needed to pay off the loan on June 1, 2019.

Write out in words the formula needed to calculate interest expense.

Write out your formula and your calculation of the interest expense that we need to record on December 31, 2018.

Write out the journal entry:

Showing your work and formula, calculate and record the journal entry needed on June 1, 2019 to fully pay off the loan.

Write out the journal entry:

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Answer #1

Interest Expenses = Loan Amount (note payable amount) x Rate of Interest x months / 12

Period from Sep 1, 2018 to Dec 31, 2018 = 4 Months

Interest on Dec 31, 2018 = 80000 x 6% x 4 / 12 = $1,600

Journal Entry on Dec 31, 2018

Interest on Note Payable A/c   Dr. 1,600

To, Interest Payable A/c 1,600

JUNE 1, 2019

Period from Dec 31, 2018 to June 1, 2019 = 5 months

Interest amount = 80,000 x 6% x 5 / 12 = $2,000

Journal Entry on June 1, 2019

Note Payable A/c Dr. 80,000

Interest Payable A/c Dr. 3,600

To, Cash A/c 83,600

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