LESSON 10 - Lesson 10 Accounting for Note Payable Let’s...

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Unformatted text preview: Lesson 10 Accounting for Note Payable Let’s again use the Note illustrated at the start of the “Notes Receivable” section of Lesson 8 to review the journal entries made by the Maker (Payee or Borrower) of a Note, including the Maker recording an Accounts Payable at Face Amount at the Date of the Note. For convenience, the Note is re-shown, exactly as illustrated in Lesson 8, as follows: In the illustrated Note above, Brent Company (Maker) borrows $1,000 on May 1, 2007 (Date of Note) from Wilma Company (Holder) for 2 months at a stated (contractual) interest rate of 8%. We will assume that Brent Company (Maker) prepares monthly financial statements, so Brent Company (Maker) will accrue interest expense at the end of May by making the appropriate adjusting journal entry. As shown in Lesson 8, the Note Maker and Note Holder record “mirror image” entries during the duration of the Note. The journal entries are shown as follows ( Notes Payable entries are in bold and “mirror image” Notes Receivable entries are not): On 5/1/2007, Brent Company (Maker) makes out the Promissory Note shown above and signs and delivers the Note to Wilma Company (Holder), whereupon Wilma Company lends Brent Company $1,000. Brent Company’s (Maker’s) Journal Entry at the inception of the Note to recognize the Notes Payable: 5/1/2007 Cash 1,000 Notes Payable 1,000 1 Wilma Company’s (Holder’s) Journal Entry at the inception of the Note to recognize the Notes Receivable: 5/1/2007 Notes Receivable 1,000 Cash 1,000 On 5/31/2007, Brent Company (Maker) accrues one month’s interest expense on the Note, and the Wilma Company (Holder) accrues one month’s interest income on the Note. As you have learned in Lesson 8, Interest = Amount of Note x Interest Rate x Time. Hence, the interest is $6.67 (1,000 x .08 x 1/12). You could also compute the simple interest based on number of days: 1,000 x .08 x 30/360 = 6.67 to derive the same interest amount. Brent Company’s (Maker’s) Journal Entry to accrue 1-month of interest expense: 5/31/2007 Interest Expense 6.67 Interest Payable 6.67 Wilma Company’s (Holder’s) “mirror image” Journal Entry to accrue 1-month of interest income: 5/31/2007 Interest Receivable 6.67 Interest Income 6.67 Early Payment of a Notes Payable Suppose Brent Company pays the full amount due on the Note early on June 15 . The interest for the first 15 days in June is $3.33 ($1,000 x .08 x 15/360), and the journal entry that Brent Company enters is: days in June is $3....
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LESSON 10 - Lesson 10 Accounting for Note Payable Let’s...

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