Answer:
July 1, 2022:
Debit Cash $53,000
Credit Note payable $53,000
(To record note payable - 9-month, 8% note)
Nov. 1, 2022:
Debit Cash $56,000
Credit Note payable $56,000
(To record note payable - 3-month, 6% note)
Dec. 31, 2022:
Debit Interest expense $2,120
Credit Interest payable $2,120
(To record 6 months interest payable on 9-month, 8% note)
Debit Interest expense $560
Credit Interest payable $560
(To record 2 months interest payable on 3-month, 6% note)
Feb. 1, 2023:
Debit Note payable $56,000
Debit Interest payable $840
Credit Cash $56,840
(To record payment of principal & interest to Lyon County State Bank)
Apr. 1, 2023:
Debit Note payable $53,000
Debit Interest payable $3,180
Credit Cash $56,180
(To record payment of principal & interest to First National Bank)
Explanation:
Note is a promissory note with a written agreement made by the borrower to the lender (payee) to pay a certain, specific sum at a specified date. At times, it is used in lieu of accounts receivable because it is interest-bearing.
Interest expense on the note is calculated as: Principal x Interest Rate x Time
First National Bank Note:
The total interest expense is $53,000 x 8%/12 x 9 months = $3,180.
Monthly interest expense is therefore $3,180 / 9 months = $353.33.
Total interest as at December 31, 2022 (July 1 - Dec 31): $353.33 x 6 months = $2,120.
Lyon County State Bank Note:
The total interest expense is $56,000 x 6%/12 x 3 months = $840.
Monthly interest expense is therefore $840 / 3 months = $280.
Total interest as at December 31, 2022 (Nov. 1 - Dec 31): $280 x 2 months = $560.
