During 2015, Brown Capacitor Corp. did not have any short-term notes outstanding

Question

During 2015, Brown Capacitor Corp. did not have any short-term notes outstanding until
September 1, 2015 when it entered into a loan agreement with its primary bank. Brown
Capacitor Corp. received $600,000 on September 1, 2015 as the proceeds from the loan and
issued a nine-month promissory note bearing 7.5% annual interest to the bank. Under the
terms of the note, Brown Capacitor Corp. was required to make quarterly interest payments to
the bank on December 1, March 1, and June 1 with the note’s entire face value due with the
third interest payment when the note matured on June 1, 2016.

a. Prepare the general journal entry to record the proceeds from the loan and the issuance
of the note on September 1, 2015. Post the entry to the relevant T-account(s) on the
following page

b. Prepare the general journal entry to record the interest paid by Brown to its bank on
December 1, 2015.

c. Prepare the necessary adjustment for interest on the note at December 31, 2015 in
general journal form.

.

Explanation / Answer

Journal entries:

a) September 1, 2015:

Cash........................................................................$600,000

                    Notes payable..............................................................$600,000

b) December 1, 2015:

Interest expense.....................................................$11,250 (600000*7.5%*1/4)

                    Cash............................................................................$11,250

Note: If the firm is preparing monthly accounts, then the entry for the monthly interest of $3750 would be made by debiting 'interest expense' and crediting 'interest payable' for each of the three months September, October and November. On payment of interest on December 1, 2015, the entry would be to debit interest payable with $11,250 the credit being to cash.

c) December 31, 2015:

Interest expense.....................................................$3,750 (one months interest 600000*7.5%*1/12)

                   Interest payable............................................................$3,750

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