On Hune 1, Coble Company Ltd. borrows $40,000 from first Bank on a 6-month, $40,000, 9% note. The note matures on December 1.
a) Prepare the entry on June 1.
b)Prepare the adjusting entry on June 30.
c) Prepare the entry at maturity(december 1), assuming monthly adjusting entries have been made through November 30.
d) What was the total financing cost(interest expense)
plz help my homework. thx for reading.
a) To prepare the entry on June 1, you need to record the borrowing of $40,000 from the bank. Here's the journal entry:
Date: June 1
Debit: Cash - $40,000
Credit: Notes Payable - $40,000
In this entry, we debit the Cash account to reflect the increase in cash due to the loan, and credit the Notes Payable account to record the liability for the borrowed amount.
b) To prepare the adjusting entry on June 30, we need to accrue the interest expense for the month. Assuming a 30-day month, the interest for June can be calculated as follows:
Principal amount: $40,000
Interest rate: 9%
Number of days in June: 30
Interest expense for June = (Principal amount * Interest rate * Number of days) / (Number of days in a year)
Interest expense for June = ($40,000 * 9% * 30) / 365 = $986.30 (rounded to the nearest cent)
Now, let's prepare the adjusting entry:
Date: June 30
Debit: Interest Expense - $986.30
Credit: Interest Payable - $986.30
In this entry, we debit the Interest Expense account to record the expense incurred during the month, and credit the Interest Payable account to record the unpaid interest that we owe as of June 30.
c) To prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30, you need to record the repayment of the note plus the interest expense. Let's assume the interest expense for each month is as follows:
June: $986.30
July: $370 (assuming a 31-day month)
August: $370
September: $370
October: $370
November: $370
On December 1, the journal entry will be:
Date: December 1
Debit: Notes Payable - $40,000
Debit: Interest Expense - $2,826.30 ($986.30 + $370 + $370 + $370 + $370 + $370)
Credit: Cash - $43,826.30 ($40,000 + $2,826.30)
In this entry, we debit the Notes Payable account to remove the liability for the borrowed amount, debit the Interest Expense account to record the total interest expense incurred throughout the period, and credit the Cash account to reflect the payment made to the bank.
d) The total financing cost (interest expense) is calculated by summing up the monthly interest expenses. In this case, the total financing cost is:
June: $986.30
July: $370
August: $370
September: $370
October: $370
November: $370
Total financing cost = $986.30 + $370 + $370 + $370 + $370 + $370 = $2,826.30
Therefore, the total financing cost (interest expense) for the loan is $2,826.30.