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 Peachey Posts: 99, Reputation: 1 Junior Member #1 Jun 1, 2009, 10:55 AM
Notes Payable & Notes Receivable
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 months... 9%
Mar-1... 75,000 note due in 6 months... 12%

NOTES RECEIVABLE
Feb 1... 60,000 note due in 3 months... 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?
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #2 Jun 1, 2009, 11:38 AM

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.
 Peachey Posts: 99, Reputation: 1 Junior Member #3 Jun 1, 2009, 12:04 PM
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.
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #4 Jun 1, 2009, 12:30 PM
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 calculate 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.
 Peachey Posts: 99, Reputation: 1 Junior Member #5 Jun 1, 2009, 12:57 PM
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.
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #6 Jun 1, 2009, 09:21 PM
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.
 morgaine300 Posts: 6,561, Reputation: 276 Uber Member #7 Jun 2, 2009, 12:41 PM

You're welcome. :-)
 mel4u Posts: 1, Reputation: 1 New Member #8 Nov 15, 2010, 07:49 PM
I was wondering if you could help me, I have been going over this for hours and I am stuck... trying to calculate bonds...
Pruitt Corporation issued 3,000, 8%, 5-year, \$1,000 bonds dated January 1, 2011, at face value.
Prepare the journal entry to record the first interest payment on July 1, 2011 (interest payable semiannually), assuming no previous accrual of interest.

Halloway Company has issued three different bonds during 2011. Interest is payable semiannually on each of these bonds.

1. On January 1, 2011, 1,000, 8%, 5-year, \$1,000 bonds dated January 1, 2011, were issued at face value.
2. On July 1, \$800,000, 9%, 5-year bonds dated July 1, 2011, were issued at 102.
3. On September 1, \$200,000, 7%, 5-year bonds dated September 1, 2011, were issued at 98.

Prepare the journal entry to record each bond transaction at the date of issuance..

Prepare the adjusting journal entry on December 31, 2011, to record interest expense.
 Just Looking Posts: 1,610, Reputation: 480 Ultra Member #9 Nov 15, 2010, 08:52 PM

First of all, it's better to ask a question as a new question rather than adding to an old post. When I am looking to see if there are new questions, I often look at one with no answers - especially when there are several questions. Posting as a new subject is more likely to get you an answer.

Okay, to answer your question:

Pruitt Corporation: For each bond of \$1,000 at 8%, you would be paying interest of \$80 (1000*.08) per year, so for 3000 you would be paying interest of \$240,000 (80*3000). They are paying this semi-annually, so each semi-annual interest payment will be \$120,000.

To accrue the interest, you would make the entry:

Interest Expense ......................120,000.00
Interest Payable .......................................... 120,000.00

When paid:

Interest Payable..........................120,000.00
Cash.............................................. ...............120,000.00

If paid immediately when due, you could combine these:

Interest Expense..........................120,000.00
Cash.............................................. ................120,000.00

Halloway Company:
1. This means the company has issued bonds to raise money. Bonds raised at face value means in this case they were issued for \$1,000. Since 1000 bonds were issued at \$1,000, the company raised \$1,000,000 (1000*1000). The entry is:

Cash..........................................1,00 0,000.00
Bonds Payable........................................... .......1,000,000.00

2. These bonds are being issued at a premium. Instead of being issued for \$1,000 they are issued at \$1,020 (102 means they were sold at 102% of the face value = 1000*1.02=1020). This can happen for a couple of reasons. For example, you will notice that the interest rate is higher on this bond, making the bond more attractive for investors. Since 800 bonds were issued at \$1,020, the company raised \$816,000 (800*1020). The entry is:

Cash............................................81 6,000.00
Bonds Payable........................................... ..... 800,000.00
Premium on Bonds Payable...................................16,000.0 0

3. These bonds are being sold at a discount. They are issued at \$980 (1000*98%). You will notice they are at a lower interest rate, making them less desirable. The entry is:

Cash...........................................196 ,000.00
Discount on Bonds Payable.................4,000.00
Bonds Payable........................................... ..... 200,000.00

You'll notice in each case, cash is the amount actually received. Bonds Payable is the amount the company will have to pay when the bond mature, which is the face value of the bond times the number of bonds issued.

To record interest expense at December 31, you apply the interest rate to the face value of the bonds, as in the first example. These don't say they are payable semi-annually, though.

Please ask if you have any questions.

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