PROBLEM #1 On March 1, of the current year the Johnson Company negotiated a, 12%
ID: 2581569 • Letter: P
Question
PROBLEM #1
On March 1, of the current year the Johnson Company negotiated a, 12%, 1-year, $100,000 note with Low Mountain Savings and Loan.
Show the effects on the accounting equation, by account title and record the journal entry:
1. At the origination of the loan.
Assets = Liabilities + Equity
2. To record year-end interest.
Assets = Liabilities + Equity
3. At the maturity of the note.
Assets = Liabilities + Equity
PROBLEM #2
Explanation / Answer
DR = Debit, CR = Credit
1.) Origination:
DR: Cash 100,000
CR: Note Payable 100,000
Assets +100,000; Liabilities +100,000; Equity +0
Net effect: Each side is increased by 100,000
2.) Year-End Interest ($100,000 x 12% x 300/360) >Assuming a 360-day year, 30 days per month, 10 months of interest = 300/360:
DR: Interest Expense 10,000
CR: Interest Payable 10,000
Assets +0; Liabilities +10,000; Equity -10,000
An expense will lower Net Income, thus lowering Retained Earnings, thus lowering Equity.
Net effect: No change to either side. Liabilties and Equity cancel each other out.
3.) Maturity of Note:
We will have another 2 months ($100,000 x 12% x 60/360) of interest that will need to be expensed in addition to paying off the principal of the note and the interest already accrued.
DR: Note Payable 100,000
DR: Interest Expense 2,000
DR: Interest Payable 10,000
CR: Cash 112,000
Assets -112,000; Liabilities -110,000; Equity -2,000
Net effect: Each side decreases by 112,000.
Hope that helps. Please rate. Thanks!
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