# On 10/1/12, Conan lent $30,000 to another company. The other company signed a nine-month, 12%...

## Question:

On 10/1/12, Conan lent $30,000 to another company. The other company signed a nine-month, 12% note that is dated 10/1/12 and matures with interest on 6/30/13. Prepare the 12/31/12 adjusting entry and the entry when Conan collects the principal and total interest on 6/30/13.

## Interest

Interest is the income earned by lending money to someone within a specified period of time agreed between the lender and the borrower. It is computed by simply multiplying the principal amount by the interest rate and the period of loan.

## Answer and Explanation:

We will use the below formula in order to compute for the interest expense:

{eq}i~=~(P*r*t)\\ Where:\\ P~=~principal\\ r~=~interest~rate\\ t~=~tenor~of~the~loan {/eq}

October 1 to December 31, when computed, is around 3 months or 90 days.

{eq}i~=~(30,000*0.12*3/12) {/eq}

The interest expense for 3 months is $900

To record for the accrual of interest on 12/31/12.

Accounts | Debit | Credit |
---|---|---|

Interest Receivable | 900 | |

Interest Income | 900 |

To record for the collection of principal and interest on 6/30/13.

Same as the first journal entry, we will compute for the interest earned from January 1 up to June 30, which is six months.

{eq}i~=~(30,000*0.12*6/12) {/eq}

The interest earned for 6 months is $1,800

Accounts | Debit | Credit |
---|---|---|

Cash (30,000 + 1,800 + 900) | 32,700 | |

Notes Receivable | 30,000 | |

Interest Receivable | 900 | |

Interest Income | 1,800 |

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from NY Regents Exam - Integrated Algebra: Help and Review

Chapter 16 / Lesson 7