C. S. Lewis Company had the following transactions involving notes payable.

July 1, 2014 Borrows $50,000 from First National Bank by signing a 9-month, 8% note.
Nov. 1, 2014 Borrows $60,000 from Lyon County State Bank by signing a 3-month, 6% note.
Dec. 31, 2014 Prepares adjusting entries.
Feb. 1, 2015 Pays principal and interest to Lyon County State Bank.
Apr. 1, 2015 Pays principal and interest to First National Bank.

Prepare journal entries for each of the transactions. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

July 1, 2014:

Debit Cash                                         $50,000

Credit Note payable                          $50,000

(To record note payable - 9-month, 8% note)

Nov. 1, 2014:

Debit Cash                                         $60,000

Credit Note payable                          $60,000

(To record note payable - 3-month, 6% note)

Dec. 31, 2014:

Debit Interest expense                       $2,000

Credit Interest payable                       $2,000

(To record 6 months interest payable on 9-month, 8% note)

Debit Interest expense                          $600

Credit Interest payable                          $600

(To record 2 months interest payable on 3-month, 6% note)

Feb. 1, 2015:

Debit Note payable                            $60,000

Debit Interest payable                             $900

Credit Cash                                         $60,900

(To record payment of principal & interest to Lyon County State Bank)

Apr. 1, 2015:

Debit Note payable                           $50,000

Debit Interest payable                         $3,000

Credit Cash                                        $53,000

(To record payment of principal & interest to First National Bank)

Explanation:

Note 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

First National Bank Note:

The total interest expense is $50,000 x 8%/12 x 9 months = $3,000.

Monthly interest expense is therefore $3,000 / 9 months = $333.33.

Total interest as at December 31, 2014 (July 1 - Dec 31): $333.33 x 6 months = $2,000.

Lyon County State Bank Note:

The total interest expense is $60,000 x 6%/12 x 3 months = $900.

Monthly interest expense is therefore $900 / 3 months = $300.

Total interest as at December 31, 2014 (Nov. 1 - Dec 31): $300 x 2 months = $600.

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