On June 1, Bert Simpson Company borrows $75,500 from Leesa Bank on a 6-month, $75,500, 5% note....

Question:

On June 1, Bert Simpson Company borrows $75,500 from Leesa Bank on a 6-month, $75,500, 5% note.

a. Prepare the entry on June 1.

b. Prepare the entry on June 30.

c. Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been mode through November 30.

d. What was the total financing cost (interest expense)?

Notes Payable:

When money is borrowed in exchange for a note issued, the transaction to receive the capital must be recorded in the ledger. The interest on the loan must be recorded as and when it is incurred.

Answer and Explanation:


Date Description Debit Credit
a June 1 DR Cash $75,500 The cash asset will increase wit the amount received from the loan
CR Notes Payable $75,500 The liability will also increase
To record amount borrowed from Leesa Bank
b June 30 DR Interest expense $314.58
($75,500 x 0.05 = $3,775 / 12)
The interest expense will increase with the interest incurred
CR Interest Payable $314.58 The current liability will also increase
To record interest incurred for one month
c Dec 1 DR Notes Payble $75,500 The liability will decrease when it is settled
DR Interest payble $1,888
($314.58 x 6)
The current liability is also paid
CR Cash $77,388 The cash asset decreases with the amount paid
To record the settlement of note payable plus interest


d) The total financing cost is:

Loan amount $75,500
Interest rate 5%
Interest for 12 months $3,775
Interest for 6 monhts = Total financing cost $1,888



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Accounting for Non-Interest & Interest-Bearing Notes

from Accounting 202: Intermediate Accounting II

Chapter 4 / Lesson 7
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