Question

On October 1, Bramble's Carpet Service borrows $362000 from First District Bank on a 3-month, $362000, 6% note. What entry must Bramble's Carpet Service make on December 31 before financial statements are prepared?

Answer 1

Dr Interest expense -$21,720

Cr interest Payable - $21,720

Step-by-step explanation:

Interest

Since it is a short-time loan (3-month), the interest rate will be prorated to 3-month.

Interest expense = $362,000 × .06 × 3/12 = $21,720

Hence, following entries will be recorded :

Dr Interest expense -$21,720

Cr interest Payable - $21,720

For Principal amount Borrowed:

Cr Loan payable $362000

Dr. Bank Account $362000

Upon Settlement :

Dr. Interest Payable $21,720 and Cr Bank Account $21,720

Dr. Loan payable $362000 and Cr Bank Account $362000