On April 12, Hong Company agrees to accept a 60-day, 8%, $8,100 note from Indigo Company to extend the due date on an overdue account. What is the journal entry that Indigo Company would make, when it records payment of the note on the maturity date?

The Journal entry is:

Debit notes payable = $8,100

Debit Interest Expense = $108

Credit cash = $8,208

Explanation:

In this question, we are asked to calculate the Journal entry that would be made by Indigo company when it records payment of the note on the maturity date.

This can be calculated as follows:

Firstly, we calculate the interest on notes expenses:

It should be noted that we use 360 days in a year.

Interest on notes expenses = 8/100 * 8,100 * 60/360 = $108

The liability repaid has a value of $8,100

Now we calculate the value of the total cash outflow = The liability repaid + interest on notes expenses = $108 + $8,100 = $8,208.

The Journal entry is thus recorded as the following:

Debit notes payable = $8,100

Debit Interest Expense = $108

Credit cash = $8,208