How Do I Journalize a Bank Note That is Past Due With a 30 Day Extension at 12%?
- 1). Journalize the original bank note entry. When a bank issues a note to a customer, they journalize it by posting a debit to cash, which records the bank giving cash to the customer, and a credit to notes receivable. A customer receiving the note journalizes it by debiting cash, which records the receipt of cash, and credits notes payable.
- 2). Perform a journal entry when the note was supposed to be paid. If the note was due on April 1st, but an extension was granted, a journal entry is required for both the bank and the customer. Assuming the note was for $5,000 at 12 percent interest for 30 days, the bank records the extension by debiting Earned Interest for $50 and Interest Receivable for $50. The interest is calculated by multiplying the principal amount times the interest rate times 30 days and dividing the total by 360 days. The customer records the accrued interest by debiting Interest Expense for $50 and Interest Payable for $50.
- 3). Record the final transaction after the 30-day extension is granted and new due date arrives. At this date, the customer pays the note including all accrued interest. Additional interest in now added after the extension of 30 days. The interest is calculated by taking the full amount due of $5,050, which is principal plus interest, and multiplying it by 12 percent and 30 days. The total is divided by 360 days and that tells the current interest amount of $50.50. The transaction for the bank to record payment is a debit of $5,000 to Notes Receivable, a debit to Earned Interest for $50.50, a debit to Interest Receivable for $50 and a credit to cash for $5,100.50. The customer records the payment by debiting Notes Payable for $5,000, Interest Payable for $50, Interest Expense for $50.50 and crediting cash for $5,100.50.