On June 1, Coble Company Ltd. borrows $64,000 from First Bank on a 6-month, $64,000, 9% note. The note matures on December 1. (List multiple debit/credit entries from largest to smallest.)
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)?
a) To prepare the entry on June 1, you need to record the borrowing of $64,000 from First Bank. The entry will be:
Debit: Cash - $64,000
Credit: Notes Payable - $64,000
Explanation: You debit the Cash account because you received cash from the bank, increasing your asset. At the same time, you credit the Notes Payable account to record the debt you owe to First Bank.
b) To prepare the adjusting entry on June 30, you need to accrue interest expense for one month. The entry will be:
Debit: Interest Expense - (Principal amount * Interest rate * Time)
Credit: Interest Payable - (Principal amount * Interest rate * Time)
In this case, the interest expense for one month would be ($64,000 * 9% * 1/12) = $480.
Debit: Interest Expense - $480
Credit: Interest Payable - $480
Explanation: You debit the Interest Expense account to recognize the cost of borrowing during the month. At the same time, you credit the Interest Payable account to record the accrued interest that is yet to be paid.
c) To prepare the entry at maturity on December 1, assuming monthly adjusting entries have been made through November 30, you need to record the payment of the note and any accrued interest. The entry will be:
Debit: Notes Payable - $64,000
Debit: Interest Expense - (Principal amount * Interest rate * Time)
Credit: Cash - ($64,000 + Interest Expense)
In this case, the interest expense for six months would be ($64,000 * 9% * 6/12) = $2,880.
Debit: Notes Payable - $64,000
Debit: Interest Expense - $2,880
Credit: Cash - ($64,000 + $2,880)
Explanation: You debit the Notes Payable account to reduce the liability and mark it as paid. You also debit the Interest Expense account to record the remaining interest expense for the entire term of the note. Finally, you credit the Cash account for the total amount paid, which includes both the principal and the accumulated interest.
d) The total financing cost (interest expense) can be calculated by summing up the interest expense recorded in the adjusting entries. In this case, we accrued $480 of interest expense each month for six months.
Total interest expense = $480 * 6 = $2,880
Explanation: To find the total financing cost, you multiply the monthly interest expense by the number of months the note was outstanding. In this example, the note was outstanding for six months, so the total interest expense is $2,880.