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16 July, 02:02

On September 1, 2017, Banner Co. borrowed $70,000 from the City Bank for five months at 9%. Interest was properly accrued on December 31, 2017. The payment of the note and accrued interest on the due date will cause:

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  1. 16 July, 02:24
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    Dr Notes payable $70,000

    Dr Interest payable $2,100

    Dr interest expense $525

    Cr Cash ($70,000+$2100+$525) $ 72,625

    Explanation:

    Firstly on 31 December 2017, the interest accrued on the loan should be recognized in the books as follows:

    $70,000*9%*4/12=$2100

    The accrued interest is debited to interest expense and credited to interest payable.

    However, on due date which is 31st January 2018, one month interest must also be recognized $70,000*9%*1/12=$525

    The notes payable must debited with the face value in order to cancel out the obligation with cash payment
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