This is the question in one of the memorandum for journal entry.


I have completed negotiations with central National Bank to borrow $20,000.
Prepare a journal entry to issue a 60-day, 10% not to the bank for that amount.

Please help me in answering the question.

Thank you

If this is just a memo from the boss, you shouldn't be making any kind of journal entry. You need to wait until you receive actual papers to look at (e.g, a copy of the mortgage agreement).

Dr. Cash 20,000
Cr. Notes Payable – Central National Bank 20,000
Interest would be 20,000 x .1 x 2/12 = 333.33

Captain Forest,

I read your answering post to the person who asked about A-1 Photography, where the owner of our fictitious company takes out a $20,000 loan on 12 September with 10% interest for 60 days.

I agree that there is no journal entry until the end of the month, so that journal entry was easy for me. What I'm having trouble with is the end of month adjusting entry that asks us to accrue interest on the note payable for the month of September.

If the loan is taken out on 12 September, interest begins accruing on 13 September and continues until 30 September, which is 18 days. So, $20,000 x .1 x 18/60 (or 3/10) = $600 interest accrued for the month of September.

If that is correct, I cannot figure out what else I have done wrong on the adjusting entries for this project, because my Trial Balance total matches the Key Figures, but my Adjusting Entries total does not. I am off by $800 too much.

Any help you can give would be MOST appreciated.

Thanks,
Arlene

Your interest calculation is wrong.

TOTAL Interest would be 20,000 x .1 x 2/12 = 333.33

But since you only want 12 of the 60days, the calculation you want is 20,000 x .1 x 18/365 = 98.63

The problem with your interest calculation is that you based the 10% on the 2 months only. In fact, it is pro rated in terms of 10% over the year.