Question

The following selected transactions relate to liabilities of Rocky Mountain Adventures. Rocky Mountain's fiscal year ends on December 31.
January 13: Negotiate a revolving credit agreement with First Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $10 million at the bank's prime rate.
February 1: Arrange a three-month bank loan of $4.3 million with First Bank under the line of credit agreement. Interest at the prime rate of
7% is payable at maturity.
May 1: Pay the 7% note at maturity.
Record the appropriate entries, if any, on January 13, February 1, and May 1.

Answer 1

Answer: See explanation

Explanation:

The appropriate entries will be recorded thus:

13 Jan No entry

1 Feb Debit Cash account $4,300,000

Credit Note payable $4,300,000

(For note issued on borrowing)

1 May Debit Interest Expense $4,300,000 × 7% × 3/12 = $75250

Debit Notes payable $4,300,000

Credit Cash account $4,375,250

(For amount paid on maturity)