Question

The Eldorado Corporation’s controller prepares adjusting entries only at the end of the reporting year. The following adjusting entries were prepared on December 31, 2021:
Debit Credit
Interest expense 7,560
Interest payable 7,560
Rent expense 34,000
Prepaid rent 34,000
Interest receivable 600
Interest revenue 600

Additional information:
1. The company borrowed $252,000 on March 31, 2021. Principal and interest are due on March 31, 2022. This note is the company’s only interest-bearing debt.
2. Rent for the year on the company’s office space is $51,000. The rent is paid in advance.
3. On October 31, 2021, Eldorado lent money to a customer. The customer signed a note with principal and interest at 3.0% due in one year.

Required:
a. What is the interest rate on the company's note payable?
b. The 2021 rent payment was made at the beginning of which month? (Do not round your intermediate calculation.)
c. How much did Eldorado lend its customer on October 31?

Answer 1

Answer:

1. The interest rate on the Company's note payable is 4 %

2. The rent payment was made in the beginning of April 2021

3. The amount of lending by Eldorado is $ 80,000

           

Explanation:

a. Computation of rate of interest on note payable.

Principal amount of note                                                        $ 252,200

Period of interest April 01 - Dec 31 2021                                 9 months

Amount of interest                                                                      $ 7,560

Full year interest is

interest amount for 9 months /9 * 12 months                            $ 10,080

Interest rate = Annual interest / Principal note value * 100      

$ 10,080/$ 252,200 *100 =                                                        4 %

b. Computation of period of rent payment

The total rent payment is                                                          $ 51,000

Amount of expired rent                                                             $ 34,000

Ratio of expired portion of rent

Expired portion/ Total rent      $ 34,000/ $ 51,000                    2/3 times

Considering the expired portion over the 12 month period

2/3 * 12 = 8 months

so the rent payment was made 8 months prior to December 31 i.e April 01

c. Computation of amount of lending to customer

Interest receivable adjusted                                                       $   600

Period of lending to December 31                                            3 months

Interest rate on lending                                                                 3 %

The annual interest on th lending needs to be calculated as follows:

Interest for 3 months/ 3 months * 12 months

$ 600/3 * 12                                                                                 $ 2,400

To calculate the amount of lending, we consider the annual interest and divide it by the interest rate

$ 2,400/ 0.03          = $ 80,000