Question

Organic Farmers Co-Op borrows $336,000 cash on October 1, 2018, by signing a 180-day, 15% note with a face value of $336,000.

Required:

1. How much interest expense results from this note in 2018?

2. How much interest expense results from this note in 2019?

3. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest at the end of 2018, and (c) payment of the note at maturity. (Assume no reversing entries are made.)

Answer 1

1) Interest expense in 2018 = 336000*15%*90/360 = $12600

2) Interest expense in 2019 = 336000*15%*90/360 = $12600

3) Journal entries :

No	account and explanation	debit	credit
a	Cash	336000
	Notes payable		336000
	(To record issue note)
b	Interest expense	12600
	Interest payable		12600
	(To record accured interest)
c	Notes payable	336000
	Interest payable	12600
	Interest expense	12600
	Cash		361200
	(To record payment of note)