Question

11. Purchased a parcel of land on March 1, 2020 for $950,000 by paying $490,000 in cash and signing a short-term note payable with the seller for $460,000. You must repay the $460,000 in exactly one year on March 1, 2021. You agree to pay the seller 5 percent interest (annual rate) on a quarterly basis (June 1, September 1, December 1, 2020, and March 1, 2021). [Adjusting Entry Required]

Answer 1

Adjusting Entry:

June 1:

Debit Interest Expense $5,750

Credit Cash $5,750

To record the interest expense.

September 1

Debit Interest Expense $5,750

Credit Cash $5,750

To record the interest expense.

December 1, 2020

Debit Interest Expense $5,750

Credit Cash $5,750

To record the interest expense.

March 1, 2021:

Debit Short-term Note Payable $460,000

Debit Interest Expense $5,750

Credit Cash $465,750

To record the full settlement on account.

Step-by-step explanation:

a) Data and Calculations:

Short-term note payable = $460,000

Interest expense = $5,750 ($460,000 * 5% * 1/4)