Question

On August 1, 2018, Trico Technologies, an aeronautic electronics company, borrows $21 million cash to expand operations. The loan is made by FirstBanc Corp. under a short-term line of credit arrangement. Trico signs a six-month, 9% promissory note. Interest is payable at maturity. Trico’s year-end is December 31. Required: 1., 2. & 3. Record the necessary entries in the Journal Entry Worksheet below for Trico Technologies.

Answer 1

Answer:

Explanation:

The journal entries are shown below:

(1) Cash A/c Dr $21,000,000  

      To Notes payable A/c $21,000,000  

(Being note is issued for cash)

(2) Interest expense A/c Dr $787,500

             To Interest payable A/c $787,500

(Being accrued interest adjusted)

The interest payable would be

= Principal × rate of interest × number of months  ÷ (total number of months in a year)  

= $21,000,000 × 9% × (5 months ÷ 12 months )

= $787,500

The 5 months is calculated from August 1 to December 31

(3) Interest expense A/c Dr  $157,500

   Interest payable A/c Dr $787,500

   Notes payable A/c Dr $21,000,000

                   To Cash A/c $21,945,000

(Being cash is paid on maturity)

The interest expense  is computed below:

= Principal × rate of interest × number of months ÷ (total number of months in a year)  

= $21,000,000 × 9% × (1 month ÷ 12 month)

= $157,500