Chapter 9, Problem 92PSB

To determine

(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:

Journal entry for money borrowed.

Answer to Problem 92PSB

Journal Entry for issuance of Notes at par

Date	Particulars	Debit ($)	Credit ($)
1st February 2019	Cash Dr. Notes Payable	200,000	200,000

Explanation of Solution

Given:

Borrowed $200,000 for 3years 8.6% note on 1^st Feb 2019 (interest paid annually on 31^st January).

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 February 2019	Cash Dr. Notes Payable	200,000	200,000

To determine

(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:

Adjusting Journal entry on 31^st December 2019 and 2020.

Answer to Problem 92PSB

Adjusting Journal Entry on 31^st December 2019

Date	Particulars	Debit ($)	Credit ($)
31st December 2019	Interest Expense Dr. Interest Payable	15,767	15,767

Adjusting Journal Entry on 31^st December 2020

Date	Particulars	Debit ($)	Credit ($)
31st December 2020	Interest Expense Dr. Interest Payable	15,767	15,767

Explanation of Solution

Given:

Borrowed $200,000 for 3years 8.6% note on 1^st Feb 2019 (interest paid annually on 31^st January).

The borrower is entitled to pay interest periodically, unless stated otherwise.

As per the question, the principal and interest is payable annually on 31^st January.

Adjusting Journal Entry on 31^st December 2019

Date	Particulars	Debit ($)	Credit ($)
31st December 2019	Interest Expense Dr. Interest Payable	15,767	15,767

Adjusting Journal Entry on 31^st December 2020

Date	Particulars	Debit ($)	Credit ($)
31st December 2020	Interest Expense Dr. Interest Payable	15,767	15,767

Interest Expense (annual) = $\text{Face Value of note × Stated Interest Rate}$

Interest Expense (annual) = $\text{\$200,000 × 8}\text{.6\%}$

Interest Expense (annual) = $17,200

Since, the interest is to be paid annually on 31^st January so an adjusting entry will be posted as interest payable for 11 months on 31^st December (every year until maturity).

Interest Expense (for 6 months) = $\text{Interest Expense }\left(\text{annual}\right)\text{ × }\frac{11}{\text{12}}$

Interest Expense (for 6 months) = $\text{\$17,200 × }\frac{11}{\text{12}}$

Interest Expense (for 6 months) = $15,767

Hence, an adjusting entry for 11 months interest payable of $15,767 will be recorded in the books of accounts on 31^st December (every year until maturity).

To determine

(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 31^st January 2020.

Answer to Problem 92PSB

Journal Entry for Interest Payment on 31^st January 2020

Date	Particulars	Debit ($)	Credit ($)
31st January 2020	Interest Expense Dr. Interest Payable Dr. Cash	1,433 15,767	17,200

Explanation of Solution

Given:

Borrowed $200,000 for 3years 8.6% note on 1^st Feb 2019 (interest paid annually on 31^st January).

The interest is to be paid annually on 31^st January so an adjusting entry will be posted as interest payable for 11 months on 31^st December (every year until maturity).

Adjusting Journal Entry on 31^st December 2019

Date	Particulars	Debit ($)	Credit ($)
31st December 2019	Interest Expense Dr. Interest Payable	15,767	15,767

Hence, an adjusting entry for 11 months interest payable of $15,767 will be recorded in the books of accounts on 31^st December (every year until maturity).

Following is the journal entry to record the payment of interest expense for remaining 1 month i.e. from 1^st January 2020 until 31^st January 2020 as well as payment for interest payable for previous 11 months i.e. 1^st February 2019 until 31^st December 2019.

Date	Particulars	Debit ($)	Credit ($)
31st January 2020	Interest Expense Dr. Interest Payable Dr. Cash	1,433 15,767	17,200

Interest Expense for previous 11 months was transferred to interest payable whereas for next 1 month was recorded as expense only. Hence, Interest Expense and Interest Payable were debited whereas cash is being paid so it was credited.

To determine

(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 31^st December 2020.

Answer to Problem 92PSB

Liability in Balance Sheet for year ending on 31^st December 2020

Liability	Sub-total ($)	Total ($)
Interest Payable Total Current Liability	15,767	15,767
Bonds Payable Total Long term Liability	200,000	200,000
Total Liability	-	215,767

Explanation of Solution

Given:

Borrowed $200,000 for 3years 8.6% note on 1^st Feb 2019 (interest paid annually on 31^st January).

The interest is to be paid annually on 31^st January so an adjusting entry will be posted as interest payable for 11 months on 31^st December (every year until maturity).

Date	Particulars	Debit ($)	Credit ($)
31st December 2020	Interest Expense Dr. Interest Payable	15,767	15,767

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	15,767	15,767
Bonds Payable Total Long term Liability	200,000	200,000
Total Liability	-	215,767

To determine

(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 92PSB

Combined Journal entry for payment of last year interest and repayment of note

Date	Particulars	Debit ($)	Credit ($)
31st January 2022	Notes Payable Dr. Interest Expense Dr. Interest Payable Dr. Cash	200,000 15,767 1,433	217,200

Explanation of Solution

Given:

Borrowed $200,000 for 3years 8.6% note on 1^st Feb 2019 (interest paid annually on 31^st January).

The interest is to be paid annually on 31^st January so an adjusting entry will be posted as interest payable for 11 months on 31^st December (every year until maturity).

Date	Particulars	Debit ($)	Credit ($)
31st December 2021	Interest Expense Dr. Interest Payable	15,767	15,767

Hence, an adjusting entry for 11 months interest payable of $15,767 will be recorded in the books of accounts on 31^st December (every year until maturity).

Following is the journal entry to record the payment of interest expense for remaining 1 month i.e. from 1^st January 2022 until 31^st January 2022 as well as payment for interest payable for previous 11 months i.e. 1^st February 2021 until 31^st December 2021.

Date	Particulars	Debit ($)	Credit ($)
31st January 2022	Interest Expense Dr. Interest Payable Dr. Cash	15,767 1,433	17,200

The money borrowed on issue of note is payable at maturity after 3 years of issue date i.e. 31^st January 2022.

Date	Particulars	Debit ($)	Credit ($)
31st January 2022	Notes Payable Dr. Cash	200,000	200,000