Could someone please help me journalize this one? I have been stuck on it all day!
Business Ltd took out a loan of $10,000 from the bank for two years. The loan is to be repaid at the end of the loan term. The interest on the loan is due monthly at the end of each month at a rate of 5% p.a., but paid on the first day of the following month. The interest is calculated on a monthly basis but not compounded.
To journalize this transaction, we need to record the initial loan received from the bank as well as the monthly interest payments. Here's how you can do it:
1. Record the initial loan received:
Debit: Cash or Bank Account (increase)
Credit: Loan Payable Account (increase)
Assuming you are using a general journal, the entry would look like this:
Date | Account | Debit | Credit
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[Loan start date] | Cash / Bank Account | $10,000 |
Loan Payable Account | | $10,000
2. Record the monthly interest payment:
Debit: Interest Expense Account (increase)
Credit: Cash or Bank Account (decrease)
To calculate the monthly interest payment, we first need to determine the amount of interest due each month. The loan has an annual interest rate of 5% p.a., which is divided by 12 to get the monthly interest rate (5% / 12 = 0.4167% per month). Multiply this monthly rate by the loan amount ($10,000) to get the interest due for each month.
Assuming the first interest payment is due on the first day of the following month, you would record the entry as follows:
Date | Account | Debit | Credit
-------------------------------------------------------------------
[First day of the following month] | Interest Expense Account | $41.67 |
Cash / Bank Account | | $41.67
Repeat this entry each month until the loan term ends. If the loan term is two years, you will have 24 monthly interest payments to record.
Remember, it's important to consult with an accountant or financial advisor for precise journal entries based on your specific business and accounting practices.