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Notes Payable: Grant Co partial refunding of debt

Notes payable

On August 31, Grant Co. partially refunded $180,000 of its outstanding 10% note payable made one year ago to Arma State Bank by paying $180,000 plus $18,000 interest, having obtained the $198,000 by using $52,400 cash and signing a new one-year $160,000 note discounted at 9% by the bank.

Instructions

(1) Make the entry to record the partial refunding. Assume Grant Co. makes reversing entries when appropriate.
(2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the discount.

Solution Preview

The opening balances before this transaction would have been:

Credit balances:
Accrued interest payable $7,200
Note payable $180,000

The interest payable would have been accrued for 4 months at 180,000 x 10% x 4 months, assuming the company was a December year end.

The entry to record the partial refunding would be:

Debit Old note payable $180,000
Debit Accrued interest payable $7,200
Debit Interest expense $10,800
Debit New Note Discount $14,400
Credit Cash 52,400
Credit New Note $160,000

If the Accrued interest payable account is not appropriate ...

Solution Summary

In a 391 word solution, the transaction is carefully explained starting with the beginning amounts that would have been in the records. Each amount is calculated and explained, and the entry is given for recording the refinance (refunding) of the debt.

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