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The Corporate Finance Institute Accounting
Interest Payable in Note Payables
Interest payable accounts also play a role in note payable situations.
For example, let’s say that XYZ Company purchases a computer on
January 1, 2016, paying $30,000 upfront in cash and a $75,000 note due
on January 1, 2019. The interest rate is 10% and is paid on January 1st of
each year.
On January 1, 2016:
DR Equipment 86,459
CR Cash: 30,000
CR Note Payable: 56,349
The note payable is $56,349, which equals to the present value of the
$75,000 due on Dec 31, 2019. The present value can be calculated using
Excel or a financial calculator.
On December 31, 2016:
DR Interest Expense: 5,635
CR Interest Payable: 5,635
The interest for the 2016 year has been incurred but is paid the
following year on January 1, 2017 so it is recorded as an interest payable
liability account in 2016.
On January 1, 2017:
DR Interest Payable: 5,365
CR Cash: 5,365
The interest payable account is then reduced to zero and paid out in
cash.
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