Copyright

On April 12, Hong Company agrees to accept a 60-day, 10%, $10,500 note from Indigo Company to...

Question:

On April 12, Hong Company agrees to accept a 60-day, 10%, $10,500 note from Indigo Company to extend the due date on an overdue account. What is the journal entry that Indigo Company would make, when it records payment of the note on the maturity date? (Use 360 days a year.)

Interest Expense:

Interest expense is a charge that a company has to pay irrespective of making profits or losses during a fiscal period. It is the cost of using the amount borrowed for a specific period of time and is paid to the lender by the borrower on a periodic basis or at maturity depending on the type of borrowing. Interest expense is a tax-deductible expense that reduces the tax burden of a company.

Answer and Explanation:


Answer:

The journal entry that will be made by Indigo Company for the payment of note on the maturity date is made below:

Date General Journal Debit Credit
June 11 Notes payable $10,500
Interest expense $175
Cash $10,675

Explanation:

As per the data provided:

  • Face value of note = $10,500
  • Note period = 60 days
  • Interest rate = 10%

Computation:

  • Interest expense on maturity = Face value of note * Interest rate * Note period / 360 days
  • Interest expense on maturity = $10,500 * 10% * 60/360
  • Interest expense on maturity = $175

And,

  • Cash paid = Face value of note + Interest due on note
  • Cash paid = $10,500 + $175
  • Cash paid = $10,675

Learn more about this topic:

Loading...
How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
37K

Related to this Question

Explore our homework questions and answers library