(a)
Introduction:
When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.
To record:
Answer to Problem 92PSA
Journal Entry for issuance of Notes at par
Date | Particulars | Debit ($) | Credit ($) |
1st June 2019 | Cash Dr. Notes Payable |
150,000 | 150,000 |
Explanation of Solution
Given:
Borrowed $150,000 for 3years 6.4% note on 1st June 2019 (interest paid annually on 31st May).
The face value of Notes issued is recorded as notes payable and any premium or discount on issue of notes is recorded in separate “Premium on Notes Payable” or “Discount on Notes Payable” account whereas in case of issuance of notes at par it is a regular journal entry where cash (asset) increased along with Notes Payable (long term liability).
Journal Entry for issuance of Notes at par
Date | Particulars | Debit ($) | Credit ($) |
1st June 2019 | Cash Dr. Notes Payable |
150,000 | 150,000 |
(b)
Introduction:
When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.
To record:
Answer to Problem 92PSA
Adjusting Journal Entry on 31st December 2019
Date | Particulars | Debit ($) | Credit ($) |
31st December 2019 |
Interest Expense Dr. Interest Payable |
4,800 | 4,800 |
Adjusting Journal Entry on 31st December 2020
Date | Particulars | Debit ($) | Credit ($) |
31st December 2020 |
Interest Expense Dr. Interest Payable |
4,800 | 4,800 |
Explanation of Solution
Given:
Borrowed $150,000 for 3years 6.4% note on 1st June 2019 (interest paid annually on 31st May).
The borrower is entitled to pay interest periodically, unless stated otherwise.
As per the question, the principal and interest is payable annually on 31st May.
Adjusting Journal Entry on 31st December 2019
Date | Particulars | Debit ($) | Credit ($) |
31st December 2019 |
Interest Expense Dr. Interest Payable |
4,800 | 4,800 |
Adjusting Journal Entry on 31st December 2020
Date | Particulars | Debit ($) | Credit ($) |
31st December 2020 |
Interest Expense Dr. Interest Payable |
4,800 | 4,800 |
Interest Expense (annual) =
Interest Expense (annual) =
Interest Expense (annual) = $9,600
Since, the interest is to be paid annually on 31st May so an adjusting entry will be posted as interest payable for 6 months on 31st December (every year until maturity).
Interest Expense (for 6 months) =
Interest Expense (for 6 months) =
Interest Expense (for 6 months) = $4,800
Hence, an adjusting entry for 6 months interest payable of $4,800 will be recorded in the books of accounts on 31st December (every year until maturity).
(c)
Introduction:
When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.
To record:
Interest payment on 31st May 2020.
Answer to Problem 92PSA
Journal Entry for Interest Payment on 31st May 2020
Date | Particulars | Debit ($) | Credit ($) |
31st May 2020 |
Interest Expense Dr. Interest Payable Dr. Cash |
4,800 4,800 |
9,600 |
Explanation of Solution
Given:
Borrowed $150,000 for 3years 6.4% note on 1st June 2019 (interest paid annually on 31st May).
The interest is to be paid annually on 31st May so an adjusting entry will be posted as interest payable for 6 months on 31st December (every year until maturity).
Adjusting Journal Entry on 31st December 2019
Date | Particulars | Debit ($) | Credit ($) |
31st December 2019 |
Interest Expense Dr. Interest Payable |
4,800 | 4,800 |
Hence, an adjusting entry for 6 months interest payable of $4,800 will be recorded in the books of accounts on 31st December (every year until maturity).
Following is the journal entry to record the payment of interest expense for remaining 6 months i.e. from 1st January 2020 until 31st May 2020 as well as payment for interest payable for previous 6 months i.e. 1st June 2019 until 31st December 2019.
Date | Particulars | Debit ($) | Credit ($) |
31st May 2020 |
Interest Expense Dr. Interest Payable Dr. Cash |
4,800 4,800 |
9,600 |
Interest Expense for previous 6 months was transferred to interest payable whereas for next 6 months it was recorded as expense only. Hence, Interest Expense and Interest Payable were debited whereas cash is being paid so it was credited.
(d)
Introduction:
When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.
To show:
Liability on balance sheet for year ending on 31st December 2020.
Answer to Problem 92PSA
Liability in Balance Sheet for year ending on 31st December 2020
Liability | Sub-total ($) | Total ($) |
Interest Payable Total Current Liability |
4,800 | 4,800 |
Bonds Payable Total Long term Liability |
150,000 | 150,000 |
Total Liability | - | 154,800 |
Explanation of Solution
Given:
Borrowed $150,000 for 3years 6.4% note on 1st June 2019 (interest paid annually on 31st May).
The interest is to be paid annually on 31st May so an adjusting entry will be posted as interest payable for 6 months on 31st December (every year until maturity).
Date | Particulars | Debit ($) | Credit ($) |
31st December 2020 |
Interest Expense Dr. Interest Payable |
4,800 | 4,800 |
This will create a short term liability “Interest Payable” in the balance sheet.
Besides, the money borrowed against note is repayable on maturity. Hence, Notes Payable value will remain unchanged.
Liability | Sub-total ($) | Total ($) |
Interest Payable Total Current Liability |
4,800 | 4,800 |
Bonds Payable Total Long term Liability |
150,000 | 150,000 |
Total Liability | - | 154,800 |
(e)
Introduction:
When a company borrows money, a formal agreement for repayment of money and stated rate of interest is signed. This is regarded as “Note” or “Notes Payable”.
To record:
Repayment of note and interest for last year.
Answer to Problem 92PSA
Combined Journal entry for payment of last year interest and repayment of note
Date | Particulars | Debit ($) | Credit ($) |
31st May 2022 |
Notes Payable Dr. Interest Expense Dr. Interest Payable Dr. Cash |
150,000 4,800 4,800 |
159,600 |
Explanation of Solution
Given:
Borrowed $150,000 for 3years 6.4% note on 1st June 2019 (interest paid annually on 31st May).
The interest is to be paid annually on 31st May so an adjusting entry will be posted as interest payable for 6 months on 31st December (every year until maturity).
Date | Particulars | Debit ($) | Credit ($) |
31st December 2021 |
Interest Expense Dr. Interest Payable |
4,800 | 4,800 |
Hence, an adjusting entry for 6 months interest payable of $4,800 will be recorded in the books of accounts on 31st December (every year until maturity).
Following is the journal entry to record the payment of interest expense for remaining 6 months i.e. from 1st January 2022 until 31st May 2022 as well as payment for interest payable for previous 6 months i.e. 1st June 2021 until 31st December 2021.
Date | Particulars | Debit ($) | Credit ($) |
31st May 2022 |
Interest Expense Dr. Interest Payable Dr. Cash |
4,800 4,800 |
9,600 |
The money borrowed on issue of note is payable at maturity after 3 years of issue date i.e. 31st May 2022.
Date | Particulars | Debit ($) | Credit ($) |
31st May 2022 |
Notes Payable Dr. Cash |
150,000 | 150,000 |
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Chapter 9 Solutions
Cornerstones of Financial Accounting
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