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Part b:
Adjusting entries concerning interest that are necessary to present fair financial statements at December 31:
Date | Account title and Explanation | Debit | Credit |
Dec 31 | Interest expense | $4,050 | |
Interest payable | $4,050 | ||
[To record accrued interest on notes payable to General motors] | |||
Dec 31 | Interest expense | $5,520 | |
Discount on notes payable | $5,520 | ||
[To record interest expense on zero-interest-baring note to Chicago national bank] |
Calculations:
(i) Interest expense on Notes payable to General motors:
Face value of the note = $48,000 - $3,000 down payment = $45,000
Interest accrued for 9 months (Apr. 1 to Dec .31)
Interest expense = $45,000 x 12% x 9/12 = $4,050
ii. Interest expense on Zero-interest Notes payable to Chicago national bank:
Face value of the notes payable | $96,980 |
(Less): Cash borrowed | ($88,700) |
Total discount on notes payable | $8,280 |
So, Total interest expense to be recorded on note is $8,280
Interest accrued for 8 months (May.1 to Dec.31)
Interest expense = $8,280 x 8/12 = $5,520
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