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

Learn more about this topic:

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How to Solve Interest Problems: Steps & Examples

from NY Regents Exam - Integrated Algebra: Help and Review

Chapter 16 / Lesson 7
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