On November 1,2015,New Morning Bakery signed a $200,000,6%,six-month note payable with the amount borrowed plus accrued interest due six months later on May 1,2016.New Morning Bakery records the appropriate adjusting entry for the note on December 31,2015.What amount of cash will be needed to pay back the note payable plus any accrued interest on May 1,2016?

Question

Quizplus · Accepted Answer

The six-month note payable was signed on November 1, 2015, and the amount borrowed plus accrued interest will be due on May 1, 2016. Therefore, the amount of interest accrued from November 1, 2015, to December 31, 2015, is one month.

Interest = Principal × Rate × Time
= $200,000 × 6% × 1/12
= $1,000

The adjusting entry on December 31, 2015, would be:
Interest Expense     $1,000
Interest Payable       $1,000

On May 1, 2016, the amount needed to pay back the note payable plus any accrued interest would be:
Note Payable            $200,000
Accrued Interest       $1,000
Total                       $201,000

However, since the question asks for the cash needed, we need to add the $6,000 interest payment to the total to get:
Total                       $201,000
Accrued Interest       $1,000
Cash Payment         $6,000
Total Cash Payment $208,000, which is closest to option D ($206,000).

On November 1,2015,New Morning Bakery Signed a $200,000,6%,six-Month Note Payable