Answer:
Issuance of the note:
Debit Cash $55,000,000
Credit Notes payable $55,000,000
(To recognize notes payable)
On December 31:
Debit Interest expense $5,362,500
Credit Interest payable $5,362,500
(To recognize the interest payable at Dec 31)
If Eder Fabrication chooses to pay off on December 31, the following entries would apply:
Debit Notes payable $55,000,000
Debit Interest payable $5,362,500
Credit Cash $60,362,500
(Payment of notes payable)
Explanation:
Note is a promissory note with a written promise made by the borrower to the lender (payee) to pay a certain, definite sum at a specified date.
Interest expense on the notes is calculated as: Principal x Interest Rate x Time
In this case, the total interest expense is $55,000,000 x 13%/12 x 9 months = $5,362,500.
Monthly interest expense is therefore $5,362,500 / 9 months = $595,833.33.
