Scenario: It's 12/31 and I'm doing financial statement accounting adjustments. On October 1st, my company borrowed $25,000 from the a bank involving a 1-year, 12% note payable. Principal ands interest are due after 1 year. On the Balance Sheet, I thought the Liabilities and Stocholders Equity would be $7k and -$7k, respectively, but that's not correct. I figured for the Income Statement, the Expenses and Net Income would be $7k and -$7k, respectively. That also isn't correct. The categories are correct, but my $ figures aren't. Could someone please help.

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Asked Sep 21, 2019
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Scenario: It's 12/31 and I'm doing financial statement accounting adjustments. On October 1st, my company borrowed $25,000 from the a bank involving a 1-year, 12% note payable. Principal ands interest are due after 1 year.

 

On the Balance Sheet, I thought the Liabilities and Stocholders Equity would be $7k and -$7k, respectively, but that's not correct. I figured for the Income Statement, the Expenses and Net Income would be $7k and -$7k, respectively. That also isn't correct. The categories are correct, but my $ figures aren't. Could someone please help. 

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Expert Answer

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Step 1

First of all, we will see the calculations with respect to borrowings made-

Bank borrowing through notes payable raised is $25,000 for 1 year @12% interest on oct 1

therefore, the accrued interest for the period of 3mnths (oct 1 to Dec 31) will be

= 25,000x12%x3/12

= $750

 

Step 2

There will be two accounting entries to be posted in books for this transaction :

 

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For Borrowing made Debit Cash On 1-oct 25,000 Credit Notes payable 25,000 For accrued interest Debit On 31st Dec Interest expense 750 Credit Interest payable 750

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Step 3

Assuming, this is the only transaction carried on during the year, the following will be the position of Income statement & Balance...

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in $ Income statement as on dec 31st in $ Balance sheet as on Dec 31 Assets Revenue 0 less: Cost of goods sold Current Assets 25,000 Cash Gross income Less: expenses Interest expense 0 25,000 Total Assets 750 Liabilities & stakeholders Equity Net Income Liabilities 750 Current liabilties Notes payable 25,750 Stakeholders Equity Net income -750 Total Liabilties & equity 25,000

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