On September 30, 2017, Coldwater Corporation purchased equipment for $1,270,000.

Question

On September 30, 2017, Coldwater Corporation purchased equipment for $1,270,000. The equipment was purchased with a $120,000 down payment and a three-year, 3%, $1,150,000 bank loan for the balance. The terms provide for payment of the bank loan with quarterly fixed principal payments of $95,833, plus interest, starting on December 31. Coldwater has a November 30 year end and records adjusting entries annually.

Record the accrual of interest expense on November 30, 2017 and first two instalment payments, on December 31, 2017, and March 31, 2018 assuming that the terms provide for quarterly blended principal and interest payments of $100,569, rather than fixed principal payments of $95,833, plus interest. (Round answers to the nearest whole dollar, e.g. 5,250. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date

Account Titles and Explanation

Debit

Credit

Nov. 30, 2017

Dec. 31, 2017

Mar. 31, 2018

Date

Account Titles and Explanation

Debit

Credit

Nov. 30, 2017

Dec. 31, 2017

Mar. 31, 2018

Explanation / Answer

Below are the required entries and explaination for each:

Date

Account Titles and Explanation

Journals

Date

Account Titles and Explanation

Debit Credit Nov. 30, 2017 Interest Expense 3,157 Interest payable 3,157 For a quarter, interest amount is ( $100,569-$95,833) $4,736 and since the financial year for Coldwater Corp ends on 30 Nov so as of 30 Nov the accrued interest is 2/3 of the quarterly accrued interest which 2/3* $4,736= $3,157. Dec. 31, 2017 Interest Payable 3,157 Loan Account 97,412 Cash 100,569 Here total cash outflow is of $100,569 which is the quarterly blended payment and since Interest was accrued as of 30 Nov was earlier debited by $3,157 at the actual payment time it is credited as it is the reduction in liability of interest nad same goes for the loan account. Mar. 31, 2018 Loan Account 100,569 Cash 100,569 Now the complete quarterly payment is adjusted against loan account as we had only $3,157 interest was accrued till 30 Nov 2017 and the loan account is debit as there is a reduction in liability and cash is credit because cash is outflow.

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