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Interest bearing notes

I am having problems with calculating the solutions for the following.

1. On October 1, 2006, Frederick Douglass Company issued a $28,000, 10%, nine-month interestbearing note.
- If the Frederick Douglass Company is preparing financial statements at December 31, 2006, the adjusting entry for accrued interest will include:
A) credit to Notes Payable of $700.
B) debit to Interest Expense of $700.
C) credit to Interest Payable of $1,400.
D) debit to Interest Expense of $1,050.
Can you please also show me how to calculate the correct method?

- Assuming interest was accrued on June 30, 2007, the entry to record the payment of the note on July 1, 2007, will include a:
A) debit to Interest Expense of $700.
B) credit to Cash of $28,000.
C) debit to Interest Payable of $2,100.
D) debit to Notes Payable of $30,100.

Can you please also show me how to calculate the correct method?

Solution Preview

1. The note is issued on Oct 1, till Dec 31, 3 months have elapsed and so we need to accrue the interest expense for 3 months. We use the simple interest formula
Interest = PXRXT
Here
Principal P = 28,000
Rate R = 10%
T= ...

Solution Summary

The solution explains the calculations for interest bearing notes

$2.19