Questions: Lily Company borrows 61,200 on July 1 from the bank by signing a 61,200, 10%, one-year note payable. (a) Prepare the journal entry to record the proceeds of the note. (b) Prepare the journal entry to record accrued interest at December 31, assuming adjusting entries are made only at the end of the year. (Credit account titles are automatically indented when amount is entered. Do not indent manually, Record journal entries in the order presented in the problem.)

To address the question, we need to prepare journal entries for two specific events related to Lily Company's borrowing of $61,200 on a one-year note payable with a 10% interest rate.

When Lily Company borrows money from the bank, it receives cash and incurs a liability in the form of a note payable. The journal entry to record this transaction on July 1 is as follows:

• Debit: Cash $61,200
• Credit: Notes Payable $61,200

This entry reflects the increase in cash due to the borrowing and the corresponding increase in liabilities.

Interest on the note is accrued over time. Since the note is for one year at a 10% interest rate, the annual interest is calculated as follows:

\[ \text{Annual Interest} = \$61,200 \times 10\% = \$6,120 \]

Since the note was issued on July 1, by December 31, six months of interest have accrued. Therefore, the accrued interest is:

\[ \text{Accrued Interest} = \frac{6}{12} \times \$6,120 = \$3,060 \]

The journal entry to record the accrued interest on December 31 is:

• Debit: Interest Expense $3,060
• Credit: Interest Payable $3,060

This entry reflects the recognition of interest expense incurred over the six months and the corresponding liability for the interest payable.

• On July 1, record the borrowing with a debit to Cash and a credit to Notes Payable for $61,200.
• On December 31, record the accrued interest with a debit to Interest Expense and a credit to Interest Payable for $3,060.