Proco had an account payable of $84,000 due to Shirmoo, Inc., one of its supplie
ID: 2417488 • Letter: P
Question
Proco had an account payable of $84,000 due to Shirmoo, Inc., one of its suppliers. The amount was due to be paid on January 31. Proco did not have enough cash on hand then to pay the amount due, so Proco's treasurer called Shirmoo's treasurer and agreed to sign a note payable for the amount due. The note was dated February 1, had an interest rate of 7% per annum, and was payable with interest on May 31.
c. May 31, to record payment of the note and all of the interest due to Shirmoo.
Proco had an account payable of $84,000 due to Shirmoo, Inc., one of its suppliers. The amount was due to be paid on January 31. Proco did not have enough cash on hand then to pay the amount due, so Proco's treasurer called Shirmoo's treasurer and agreed to sign a note payable for the amount due. The note was dated February 1, had an interest rate of 7% per annum, and was payable with interest on May 31.
Explanation / Answer
a) Notes payable
Notes payable are liabilities and represent amounts owed by a business to a third party. What distinguishes notes payable from other liabilities is that they are issued as a promissory note.
With a promissory note, the business who issued the note (called the issuer) promises in writing, to pay an amount of money (principal and interest) to a third party (called the payee) at a given time or on demand.
Journal entry
Had the notes payable been issued in respect of an overdue supplier account in order to extend the terms of payment, then this would have converted an accounts payable to a notes payable, and the debit would be to accounts payable as follows:
Accounts payable 84,000
Notes payable 84,000
b) As the notes payable charge interest, each month interest needs to be accrued
Interest expense 980
Interest payable 980
(84,000*7%*2/12)
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