Question

On June 1, Merando Company borrows $90,000 from First Bank on a 6-month, $90,000, 8% note.

Prepare the entry on June 1. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit June 1 SHOW LIST OF ACCOUNTS LINK TO TEXT

Prepare the adjusting entry on June 30. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit June 30 SHOW LIST OF ACCOUNTS LINK TO TEXT

Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30. (Credit account titles are automatically indented when amount is entered. Do not indent manually.) Date Account Titles and Explanation Debit Credit Dec. 1 SHOW LIST OF ACCOUNTS LINK TO TEXT

What was the total financing cost (interest expense)? Total financing cost $

Answer 1

Concepts and reason

Journal Entries: Journal Entries is the first step in the accounting cycle. After understanding and analyzing the transactions, transactions having a financial impact are recorded in books of accounts by following debit credit rules.

Fundamentals

Debit Credit Rule – Debit Credit rule is explained below.

1. Debit what comes in and Credit what goes out – applicable for real accounts like building, plant, and machinery, etc.

2. Debit the receiver and Credit the giver – applicable for personal accounts like capital accounts, drawings account of owners, partners, etc.

3. Debit all expenses and losses and Credit all incomes and gains – applicable for nominal accounts like interest received, rent paid, etc.

Adjusting entries: Adjusting entries are the entries that are passed at the year-end but before the finalization of the books of accounts. These entries are passed in order to make necessary adjustment of the transactions that involve accruals and deferrals.

Notes Payable: These are the promissory notes that are issued by the company in order to raise the debt. It is a part of the current liability that is shown on the balance sheet under the head current liabilities.

Interest Payable: These are the expenses related to the interest, which have been incurred, but the payment of these interests has not been made. These are shown on the liability side of the balance sheet of the company.

Interest cost: It refers to the amount paid by the borrower of the funds to the lender. Interest is paid by the borrower regularly over the period of time above the principal repayment. In this person use another person’s money in its business and pay interest on the same amount.

Cash in hand: It generally comprises of the cash or currency available with a business entity at a particular time which is used for carrying out day to day business activities and expenditures.

Liabilities: Liability is an obligation of any business. It is an amount borrowed by business from outsider of the business is called liabilities. Creditors and owners are two groups who have claims to a company's assets in lieu of the credit provided by them to the business.

1. a

Pass a journal entry to record the 8% notes payable borrowed from the bank on June 1 as follows:

1. b

Pass a journal entry to record the interest expenses for the month of June as follows:

Working Note:

Compute the interest charges for 1 month, using the equation as shown below:

$\begin{array}{c}\\{\rm{Interest expenses}} = {\rm{Notes Payable}} \times {\rm{Interest rate}} \times \frac{1}{{12}}\\\\ = \$ 90,000 \times 8\% \times \frac{1}{{12}}\\\\ = \$ 600\\\end{array}$

Hence, the interest expenses are $600.

1. c

Pass a journal entry to record the payment of interest and notes payable to the bank as follows:

Working Note:

Compute the interest expenses for 6 months, using the equation as shown below:

$\begin{array}{c}\\{\rm{Interest Expenses}} = {\rm{Notes Payable}} \times {\rm{Interest Charges}} \times \frac{6}{{12}}\\\\ = \$ 90,000 \times \frac{8}{{100}} \times \frac{6}{{12}}\\\\ = \$ 3,600\\\end{array}$

Hence, the interest expenses are $3,600.

2.

Compute the total financing cost/interest expense for 6 months, using the equation as shown below:

$\begin{array}{c}\\{\rm{Interest Expenses}} = {\rm{Notes Payable}} \times {\rm{Interest Charges}} \times {\rm{Period due}}\\\\ = \$ 90,000 \times \frac{8}{{100}} \times \frac{6}{{12}}\\\\ = \$ 3,600\\\end{array}$

Hence, the total financing cost is $3,600.

Ans: Part1a

Part 1b

Part 1c

Part 2

The total financing cost is $3,600.