Question

E10-2 Recording a Note Payable through Its Time to Maturity [LO 10-2]

Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable. For example, Mitt builds up its inventory to meet the needs of retailers selling to Christmas shoppers. A large portion of Mitt's sales are on credit. As a result, Mitt often collects cash from its sales several months after Christmas. Assume on November 1, 2018, Mitt borrowed $7.8 million cash from Metropolitan Bank and signed a promissory note that matures in six months. The interest rate was 8.00 percent payable at maturity. The accounting period ends December 31.

Required:

1, 2 & 3. Prepare the required journal entries to record the note on November 1, 2018, interest on the maturity date, April 30, 2019, assuming that interest has not been recorded since December 31, 2018. (Enter your answers in whole dollars. If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

Solution:

1, 2 & 3. Prepare the required journal entries to record the note on November 1, 2018, interest on the maturity date, April 30, 2019, assuming that interest has not been recorded since December 31, 2018.

Date	Particulars	Debit ($)	Credit($)
Nov 1,2018	Cash A/c Dr	$7,800,000
	To Note payable (short term) A/c		$7,800,000
	(To record note payable)
Dec 31, 2018	Interest expense A/c Dr (Working note)	$104,000
	To Interest payable A/c		$104,000
	(To record interest payable)
April 30,2019	Note payable (short term) A/c Dr	$7,800,000
	Interest payable A/c Dr	$104,000
	Interest expense A/c Dr (Working note)	$208,000
	To cash A/c		$8,112,000

Working notes:

Interest payable  = ($7,800,000*8%*2/12)

= $104,000

Interest expense =  ($7,800,000*8%*6/12) - $104,000

= $312,000 - $104,000

= $208,000