Question

Scrimiger Paints wants to upgrade its machinery and on September 20 takes out a loan from the bank in the amount of $600,000. The terms of the loan are 3.5% annual interest rate and payable in 8 months. Interest is due in equal payments each month. A. Compute the interest expense due each month. If required, round final answer to two decimal places. $fill in the blank 168512f2f010003_1 B. Show the journal entry to recognize the interest payment on October 20, and the entry for payment of the short-term note and final interest payment on May 20. If required, round final answers to two decimal places. If an amount box does not require an entry, leave it blank.

Answer 1

a. Total interest due for the loan = Loan amount * Interest rate p.a * Months/12 months = $600,000 * 3.5% * 8/12 = $14,000

Interest due for each month = $14,000 / 8 months = $1,750

b. Journal Entries for payment of interest and final settlement

Date Account Title and Explanation Debit Credit

Oct 20 Interest Expenses $1,750

Cash $1,750

(Interest payment entry passed)

May 20 Interest Expenses $1,750

Loan $600,000

Cash $601,750

(Entry passed for loan and final interest payment)