Answer:
April 1
Issuance of Loan Note
Dr. Cash $20,000
Cr. Loane Note Payable $20,000
December 31
Adjusting Entry of accrued interest
Dr. Interest Expane $1,350
Cr. Interest Payable $1,350
Explanation:
April 1:
First, we need to record the loan note issuance as follow:
Ringo company received the cash against the loan note issuance so the cash will be debited and a liability is created against the receipt of the cash. The Loan note payable account is credited.
December 31:
Now calculate the accrued interest for the year as follow
Accrued Interest = Value of Loan Note x Interest rate x Fraction of accrued months
Where
Value of Loan note = $20,000
Interest rate = 9%
Fraction of accrued months = Accrued months / 12 months = ( December 31 - April 1 ) / 12 months = 9 months / 12 months = 3/4
Placing values in the formula
Accrued Interest = $20,000 x 9% x 3/4
Accrued Interest = $1,350
As the payment of interest is not made so there is no cash involvement. Interest expense is recorded at the end of the period by adjusting entry of debit interest expense and credit interest payable account.
