Hi! i can't seem to understand this, i got most of answers correct but what am i doing wrong for these. please explain and show the calculation so i can realise my mistakes. Please help me, Please.

NOTES PAYABLE
Date....................Description................Interest Rate
Jan-1.........100,00 note due in 9 mths..........9%
Mar-1..........75,000 note due in 6 mths.......12%

NOTES RECEIVABLE
Feb 1..........60,000 note due in 3 mths.........6%

Assume all interest is paid at maturity and none of the notes are paid early.

What should be the entry for interest expense on March 31?
What entry should be recorded in the interest receivable account for February?
How much interest income should be recorded for the year ending December 31?
How much interest expenses is recorded for the year ending December 31?
How much cash will be paid for the January 1 note, plus interest, on October 1?

Hi Peachy. Since we're not here to do people's homework for them, we prefer to see your attempts posted so that we can look at it, and then we can tell you what you are doing wrong.

Interest is principle x rate x time. For time, when it's in months, make sure you use months/12 for time.

Ok for the interest expense on March 31

Interest Expense.............750
Interest Payable..................750
Calcualtion (100,000 x .09 x 1/12) = 750

And for the interest receivable account for February

Interest Expense---------1,500
Interest Payable--------------1,500
Calculation (100,000 x .09 x 1/12) = 750 (75,000 x .12 x 1/12) = 750
750 + 750 = 1,500

As you see i am trying, i just can't seem to go any further.

Ok for the interest expense on March 31

Interest Expense.............750
Interest Payable..................750
Calcualtion (100,000 x .09 x 1/12) = 750

OK, it's not figuring the interest that's the problem. And the accounts are correct. The problem is that you've only included one of the notes payable. You have two notes payable and interest is accruing on both of them. So you need to calulate both of them and add them together. (See below.)


And for the interest receivable account for February

Interest Expense---------1,500
Interest Payable--------------1,500
Calculation (100,000 x .09 x 1/12) = 750 (75,000 x .12 x 1/12) = 750
750 + 750 = 1,500

OK, this one is a notes receivable, which is creating two problems with what you're doing.

If you are the one who is owed the money, then why would you have interest expense and interest payable? Someone owes you money - you aren't going to be paying them interest. They're going to be paying you. The problem even says to record the interest receivable. It's the same concept, but backwards -- cause now it's on a receivable, not a payable.

Also, you're figuring the interest on the two notes payable. It says for the interest receivable, so you're working with the note receivable. And there's only one of those. So you're using the wrong notes. You have to keep straight whether you're doing a payable or receivable. I don't know why they're in the same chapter, but in real life you'd have 3 billion things going on at once and have to constantly switch gears.

In other words, this entry is the one that should have been done for the first question about the interest expense for March.

This is the way they told us to do it, i don't know what to do, my friends gave me the answers, for the questions i got wrong but without a explanation, they got the answers from the web, i want to know how to manually calculate it. e.g. for the (3) question the answer is $900, number (4) $11,250 and (5) $106,750, but how do i get the answer.

This is the way they told us to do it, i don't know what to do,

Are you referring to the first two I've already talked about? Because I can absolutely guarantee what I said was right. Receivables and payables are opposites -- they just are what they are. Or are you meaning the stuff below?

my friends gave me the answers, for the questions i got wrong but without a explanation, they got the answers from the web, i want to know how to manually calculate it. e.g. for the (3) question the answer is $900, number (4) $11,250 and (5) $106,750, but how do i get the answer.

You actually know how to calculate them -- I think you're just not getting the idea of what is or is not included.

3) 60,000 x .06 x 3/12: the interest income for the year is on the receivable one. That is someone else owing you and someone else paying interest to you, therefore interest income. And since it says for the year, then it would be everything on that note, which is 3 months. It doesn't matter when the note was due way earlier than Dec 31, as the income is still within that year.

4) Same concept. Interest expense comes off the notes payables, the ones you owe to other people. So that interest is expense. So you're using the first two notes. And again, since it's asking for the whole year, you're counting the entire note, as both the 9 month one and 6 month one are within this same year.
100,000 x .09 x 9/12
75,000 x .12 x 6/12

5) When the note is paid, both the principle (100,000) and the interest for the entire 9 months (as calculated in 4: 6750) will be paid. When a note is paid, both principle and the full interest are paid.

You're welcome. :-)