On November 1, Bahama Cruise Lines borrows $3.5 million and issues a six-month, 9% note payable. Interest is payable at maturity. Record the issuance of the note and the appropriate adjustment for interest expense at December 31, the end of the reporting period.

Bahama Cruise Lines

Journal Entries:

November 1:

Debit Cash Account $3,500,000

Credit 9% Notes Payable $3,500,000

To record the issue of a six-month note payable.

December 31:

Debit Interest Expense $52,500

Credit Interest Payable $52,500

To record the interest expense for the period.

Explanation:

a) With Bahama Cruise Lines borrowing $3.5 million on November 1 and issuing a six month, 9% note payable, the accounting entries are a debit to the Cash account for the cash received and a credit to the Note Payable account to establish the liability in the accounts.

b) Bahama Cruise Lines will accrue interest on the Note Payable for 2 months for the ending in order to comply with the accrual concept and the matching principle of generally accepted accounting principle.  The accrual basis for accounting for transactions requires that expenses are recognized when incurred and not when cash is paid.  The amount of the interest for the year is calculated as $52,500 ($3.5 million * 9%)/12 * 2.  This also accords with the matching principle which requires that expenses are matched to the revenues of the same period.

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