
Notes Payable:
Notes payable is a promissory note that is issued by the borrower to obtain a specific amount of money which the borrower promises to pay within a year on a specific date. It’s a kind of current liability.
Journal entries are the accounting transaction used to identify which accounts has been debited and credited in the journal. In the journal entries for every debit there must be a correspondence credit.
Rules of Journal Entries:
- To increases balance of account: Assets Debit, Liabilities Credit, Expenses Debit, Revenue Credit, Capital Credit
- To decreases balance of account: Assets Credit, Liabilities Debit, Expenses Credit, Revenue Debit, Capital Debit
1.
To identify: The best option.

Explanation of Solution
Option A: To borrow $6,000 as on June 1 for 90 days bearing the interest at10%.
Calculation of interest expenses of option A.
Given,
Principal is $6,000.
Rate of interest is 10%.
Time is 90 days.
Formula to calculate interest expense,
Substitute $6,000 for principal, 10% for rate o interest and 90 days for time.
The interest expenses for the option A is $150.
Option B: To borrow $6,000 as on June 1 for 120days bearing the interest at 8%.
Calculation of interest expenses for option B.
Given,
Principal is $6,000.
Rate of interest is 8%.
Time is 120 days.
Formula to calculate interest expense,
Substitute $6,000 for principal, 8% for rate of interest and 120 days for time.
The interest expenses for the option B is $160.
Since, the interest rate for option A is higher than the option B, but the interest expense for option B is higher than option A because in option A the time for borrow the loan is 90 days whereas for option B is it 120days.
So if the company prefer interest cost so option A is preferable but if the company prefer addition time to used to loan the option B should be prefer the company only has to pay $10 more for the additional 30days to used the loan for option B.
The total number of days in a year is to be rounded to 360.
2.
To prepare: Journal entries.
2.

Explanation of Solution
a.
Option A-at the date of issuance
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
June 1 | Cash | 6,000 | ||
Notes payable | 6,000 | |||
(Being the notes payable issued) |
Table (1)
- Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
- Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.
b.
Option B-at the date of issuance
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
June 1 | Cash | 6,000 | ||
Notes payable | 6,000 | |||
(Being the notes payable issued) |
Table (2)
- Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
- Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.
c.
Option A-at maturity date
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
August 31 | Notes payable | 6,000 | ||
Interest payable | 150 | |||
Cash | 6150 | |||
( Being the notes payable ha s been matured and amount of interest has been due ) |
Table (3)
- Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
- Interest payable is an expense and it is increases by $150 therefore it is debited by $160.
- Cash is an assets and cash is decrease by $6,150 so cash is credited by $6,150.
d.
Option B-at maturity date
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Sept 30 | Notes payable | 6,000 | ||
Interest payable | 160 | |||
Cash | 6160 | |||
( Being the notes payable ha s been matured and amount of interest has been due ) |
Table (4)
- Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
- Interest payable is an expense and it is increases by $160 therefore it is debited by $160.
- Cash is an assets and cash is decrease by $6,160 so cash is credited by $6,160.
3.
To explain:-the journal entries prepare in part 2
a.
Option A-at the date of issuance
- Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
- Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.
b.
Option B-at the date of issuance
- Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
- Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.
c.
Option A-at maturity date
- Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
- Interest payable is an expense and it is increases by $150 therefore it is debited by $160.
- Cash is an assets and cash is decrease by $6,150 so cash is credited by $6,150.
d.
Option B-at maturity date
- Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
- Interest payable is an expense and it is increases by $160 therefore it is debited by $160.
- Cash is an assets and cash is decrease by $6,160 so cash is credited by $6,160.
4.
To prepare:-Journal entries assuming that the funds are borrowed on 1st December.
3.

Explanation of Solution
a.
Option A-the year end adjustment
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Dec 31 | Interest expense | 50 | ||
Interest payable | 50 | |||
(Being the amount of interest become due) |
Table (5)
- Interest is an expense which increases and has due on December 31 so it is debited by $50.
- Interest payable is a liability and it is increases by $50 so it is credited by $50.
Working notes:
Calculation of amount of interest expenses on December 31
Formula to calculate the amount of interest expenses,
Substitute $6,000 for principal amount 10% for rate of interest and 30 days for time.
b.
Option B- the year end adjustment
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Dec 31 | Interest expense | 40 | ||
Interest payable | 40 | |||
(Being the amount of interest become due) |
Table (6)
- Interest is an expense which increases and has due on 31stDecember so it is debited by $40.
- Interest payable is a liability and it is increases by $40 so it is credited by $50.
Working notes:
Calculation of amount of interest expenses on December 31
Formula to calculate the amount of interest expenses,
Substitute $6,000 for principal amount 8% for rate of interest and 30 days for time.
c.
Option A-at maturity date
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Feb 28 | Interest expenses | 100 | ||
Interest payable | 50 | |||
Notes payable | 6,000 | |||
Cash | 6,150 | |||
(Being the notes payable has been mature) |
Table (7)
- Interest is an expense and it is increases by $100 therefore it is debited
- Interest payable is a liability and it is decrease by $50 therefore it is credited
- Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
- Cash is an asset and it is decreases therefore it is debited by $6,150
Working notes:
Calculation of amount of interest expenses on February 28
Formula to calculate the amount of interest expenses,
Substitute $6,000 for principal amount 10% for rate of interest and 60 days for time.
d.
Option B-at the maturity date
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Feb 28 | Interest expenses | 120 | ||
Interest payable | 40 | |||
Notes payable | 6,000 | |||
Cash | 6,160 | |||
(Being the notes payable has been mature) |
Table (8)
- Interest is an expense and it is increases by $120therefore it is debited
- Interest payable is a liability and it is decrease by $40 therefore it is credited
- Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
- Cash is an asset and it is decreases therefore it is debited by $6,160
Working note:
Calculation of amount of interest payable on February 28
Formula to calculate the amount of interest expenses,
Substitute $6,000 for principal amount 8% for rate of interest and 90 days for time.
5.
To explain: The journal entries prepare in part 4.
a.
Option A-the year end adjustment
- Interest is an expense which increases and has due on 31stDecember so it is debited by $50.
- Interest payable is a liability and it is increases by $50 so it is credited by $50.
b.
Option B- the year end adjustment
- Interest is an expense which increases and has due on 31stDecember so it is debited by $40.
- Interest payable is a liability and it is increases by $40 so it is credited by $50.
c.
Option A-at maturity date
- Interest is an expense and it is increases by $100 therefore it is debited
- Interest payable is a liability and it is decrease by $50 therefore it is credited
- Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
- Cash is an asset and it is decreases therefore it is debited by $6,150
d.
Option B-at the maturity date
- Interest is an expense and it is increases by $120therefore it is debited
- Interest payable is a liability and it is decrease by $40 therefore it is credited
- Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
- Cash is an asset and it is decreases therefore it is debited by $6,160.
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