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)?
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:
|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:
|Interest for 12 months||$3,775|
|Interest for 6 monhts = Total financing cost||$1,888|
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from Accounting 202: Intermediate Accounting IIChapter 4 / Lesson 7