Keesha Co. borrows $275,000 cash on December 1 of the current year by signing a 180-day, 9%, $275,000 note.

a. On what date does this note mature?
b. What is the amount of interest expense in the current year and the following year from this note?
c. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest on December 31, and (c) payment of the note at maturity.

(a) The note matures on May 31.

(b) Interest expense recognition for the current year (December only) will be $2,062.5. The amount of interest for the following year of the notes is $12,375 - $2,062.5 = $10,312.5

(c) (a) Journals for the note issuance:

Debit Cash                                      $275,000

Credit Note payable                       $275,000

(To record the issuance of note)

(c) (b) Journals for accrual of interest on December 31:

Debit Interest expense                    $2,062.5

Credit Interest payable                    $2,062.5

(To record the interest payable on note)

(c) (c) Journals for the payment of the note at maturity:

Debit Note payable                        $275,000

Debit Interest payable                       $12,375

Credit Cash                                      $287,375

(To record the payment of the note at maturity)

Explanation:

(a) Counting fro, December 1, with 180-day period, the note matures on May 31.

(b) Note receivable is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.

Interest expense on the note is calculated as: Principal x Interest Rate x Time

In this case, the total interest expense is $275,000 x 9%/12 x 6 months = $12,375.

Monthly interest expense is therefore $12,375 / 6 months = $2,062.5.

Therefore, interest expense recognition for the current year (December only) will be $2,062.5. The amount of interest for the following year of the note is $12,375 - $2,062.5 = $10,312.5

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