On October 1, Steve's Carpet Service borrows $350,000 from First National Bank on a 3-month, $350,000, 8% note.What entry must Steve's Carpet Service make on December 31 before financial statements are prepared?

Question

Quizplus · Accepted Answer

The 3-month note started on October 1, so it will mature on December 31. On the maturity date, Steve's Carpet Service will need to pay back the $350,000 principal plus interest at a rate of 8% for 3 months. The interest amount can be calculated as follows:

Interest = Principal x Rate x Time 
Time = 3 months / 12 months = 0.25

Interest = $350,000 x 8% x 0.25 = $7,000

Therefore, on December 31, Steve's Carpet Service must make the following entry:

Debit: Notes Payable - $350,000 
Debit: Interest Expense - $7,000 
Credit: Cash - $357,000

This entry reflects the payment of the note plus interest.

On October 1, Steve's Carpet Service Borrows $350,000 from First