Question

Greener Pastures Corporation borrowed $1,800,000 on November 1, 2015. The note carried a 8 percent interest rate with the principal and interest payable on June 1, 2016. (a) The note issued on November 1. (b) The interest accrual on December 31. 1. Indicate the effects of the amounts for the above transactions. (Enter any decreases to account balances with a minus sign. Do not round intermediate calculations.)

Answer 1

Answer:

Dr cash     $1,800,000

Cr Notes payable           $1,800,000

Interest accrual:

Dr Interest expense  $24,000

Cr Interest payable                  $24,000

Assets                             =liabilities                      +   shareholders'equity

+Cash $1,800,000          =+loan $1800,000

                                         =+liabilities $24,000    + -retained earnings  $2400

Explanation:

The issue of notes payable on November 1 2015 implies that there is cash inflow of $1,800,000 while current liabilities also increased by $1,800,000,as result cash is debited with the $1,800,000 and credit is posted notes payable.

On 31st December ,interest of two months would been incurred and should be accrued in the accounts with amount below:

$1,800,000*8%*2/12=$24,000

This should be debited to interest expense and credited to interest payable account