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    Hopkins1988's Avatar
    Hopkins1988 Posts: 3, Reputation: 1
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    #1

    Feb 11, 2012, 09:12 PM
    How would I work this problem out?
    On July 1, Contreras borrowed $20,000 from a local bank on a 10-year note. The annual interest rate is 12%.
    pready's Avatar
    pready Posts: 3,197, Reputation: 207
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    #2

    Feb 12, 2012, 03:06 PM
    Your journal entry to record the note is:
    Debit Cash for $20,000
    Credit Notes Payable for 20,000

    For the adjusting entry at the end of an accounting period is:
    Debit Interest Expense for the amount of interest owed
    Credit Interest Payable for the amount of interest owed or Credit Cash for the amount of interest paid

    To calculate interest the formula is:
    Interest = Principal * Rate * Time

    If your year end is December 31 you will have to compute 6 months of insurance:
    So $20,000 * 12% * 6/12 = interest owed during the first year.

    The journal entry for making a payment is:
    Debit Notes Payable for the amount of principal paid
    Debit Interest Expense and/or Interest Payable for the amount of interest
    Credit Cash for the whole payment

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