On October 1, Eder Fabrication borrowed $55 million and issued a nine-month, 13% promissory note. Interest was payable at maturity. Prepare the journal entry for the issuance of the note and the appropriate adjusting entry for the note at December 31, the end of the reporting period.

Issuance of the note:

Debit Cash $55,000,000

Credit Notes payable $55,000,000

(To recognize notes payable)

On December 31:

Debit Interest expense $5,362,500

Credit Interest payable $5,362,500

(To recognize the interest payable at Dec 31)

If Eder Fabrication chooses to pay off on December 31, the following entries would apply:

Debit Notes payable $55,000,000

Debit Interest payable $5,362,500  

Credit Cash $60,362,500

(Payment of notes payable)

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 notes is calculated as: Principal x Interest Rate x Time

In this case, the total interest expense is $55,000,000 x 13%/12 x 9 months = $5,362,500.

Monthly interest expense is therefore $5,362,500 / 9 months = $595,833.33.

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