Question

On August 1, 2021, Trico Technologies, an aeronautic electronics company, borrows $19.2 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, 8% promissory note. Interest is payable at maturity. FirstBanc Corp.’s year-end is December 31.
Required:
Record the necessary entries in the Journal Entry Worksheet below for Trico Technologies.

Answer 1

Answer:

See explanation section

Explanation:

August 1, 2021    Cash                Debit            $19,200,000

                         Notes payable      Credit       $19,200,000

To record the cash borrow from FirstBanc Corporation for six months, 8% promissory notes.

December 31, 2021     Interest expense      Debit         $640,000

                                      Interest payable       Credit      $640,000

To record the accrued interest expense for the year ended, December 31, 2021.

Calculation:  $19,200,000 × 8% × (5 ÷ 12) = $1,536,000 × (5 ÷ 12) = $640,000

If Trico Technologies paid the notes during maturity,

February 1, 2022   Notes payable           Debit   $19,200,000

                               Interest expense       Debit        $128,000

                               Interest payable        Debit        $640,000

                               Cash                           Credit                      $19,968,000

Calculation: $19,200,000 × 8% × (6 ÷ 12) = $768,000. As the interest accrued during the previous year and payable this year, the amount $640,000 will be remained as $640,000. The remainder amount (768,000 - 640,000) = $128,000 will be counted as interest expense.