Business, 16.02.2021 05:10 arielcainess

On April 1, Ringo Company borrowed $20,000 from its bank by issuing a 9%, 12-month note, with the interest to be paid on the maturity date. Required: Prepare journal entries to record the issuance of the note and the related year-end adjusting entry on December 31.

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Answer from: 0prayforthelost0

April 1

Issuance of Loan Note

Dr. Cash $20,000

Cr. Loane Note Payable $20,000

December 31

Adjusting Entry of accrued interest

Dr. Interest Expane $1,350

Cr. Interest Payable $1,350

Explanation:

April 1:

First, we need to record the loan note issuance as follow:

Ringo company received the cash against the loan note issuance so the cash will be debited and a liability is created against the receipt of the cash. The Loan note payable account is credited.

December 31:

Now calculate the accrued interest for the year as follow

Accrued Interest = Value of Loan Note x Interest rate x Fraction of accrued months

Where

Value of Loan note = $20,000

Interest rate = 9%

Fraction of accrued months = Accrued months / 12 months = ( December 31 - April 1 ) / 12 months = 9 months / 12 months = 3/4

Placing values in the formula

Accrued Interest = $20,000 x 9% x 3/4

Accrued Interest = $1,350

As the payment of interest is not made so there is no cash involvement. Interest expense is recorded at the end of the period by adjusting entry of debit interest expense and credit interest payable account.

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