Question

On November 1, 2018, Quantum Technology, a geothermal energy supplier, borrowed $24 million cash to fund a geological survey. The loan was made by Nevada BancCorp under a noncommitted short-term line of credit arrangement. Quantum issued a nine-month, 11% promissory note. Interest was payable at maturity. Quantum’s fiscal period is the calendar year.

Required:

1. Prepare the journal entry for the issuance of the note by Quantum Technology.

2. & 3. Prepare the appropriate adjusting entry for the note by Quantum on December 31, 2018 and journal entry for the payment of the note at maturity.

Answer 1

Journal

1	November 1, 2018,	Cash	24,000,000
		Note payable		24,000,000
2	December 31, 2018	Interest expense	440,000
		Interest payable		440,000
3	August 1, 2019	Note payable	24,000,000
		Interest payable	440,000
		Interest expense	1,540,000
		Cash		25,980,000

Interest expense on December 31, 2018 = 24,000,000 x 11% x 2/12

= $440,000

Interest expense on July 31, 2018 = 24,000,000 x 11% x 7/12

= $1,540,000

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