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Whole Leaves wants to upgrade their equipment, and on January 24 the company takes out a loan from the bank in the amount of $310,000. The terms of the loan are 6.5% annual interest rate, payable in three months. Interest is due in equal payments each month. Compute the interest expense due each month. Show the journal entry to recognize the interest payment on February 24, and the entry for payment of the short-term note and final interest payment on April 24. Round to the nearest cent if required.

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Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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Section
FindFindarrow_forward

Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 12, Problem 11EB
Textbook Problem
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Whole Leaves wants to upgrade their equipment, and on January 24 the company takes out a loan from the bank in the amount of $310,000. The terms of the loan are 6.5% annual interest rate, payable in three months. Interest is due in equal payments each month.

Compute the interest expense due each month. Show the journal entry to recognize the interest payment on February 24, and the entry for payment of the short-term note and final interest payment on April 24. Round to the nearest cent if required.

To determine

Introduction:

A short term notes payable is a promise to pay the amount of loan at a fixed rate of interest on a fixed date. The term of loan is less than one year.

To compute:

Amount of monthly interest payment. Also, record journal entries for interest payment and loan repayment.

Explanation of Solution

Computation of monthly interest payment:

Formula to calculate interest payment:

Interest=(Principal×InterestRate×Time)

Sustitute, $310,000 in principal, 6.5% in interest rate and 1/12 in time.

Interest=($310,000×6.5%×112)=$1,679

Therefore, amount of interest payment per month is $1,679.

Record interest payment:

Date Account Debit ($) Credit ($)
February, 24 Interest Expense ($310,000×6.5%×112) 1,679
Cash 1,679
(To record interest payment on loan)

Table(1)

  • Interest expense is an expense and it is increased by $1,679

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Chapter 12 Solutions

Principles of Accounting Volume 1
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