# McMasters Inc. specializes in BBQ accessories. In order for the company to expand its business, they take out a long-term loan in the amount of $800,000. Assume that any loans are created on January 1. The terms of the loan include a periodic payment plan, where interest payments are accumulated each year but are only computed against the outstanding principal balance during that current period. The annual interest rate is 9%. Each year on December 31, the company pays down the principal balance by$50,000. This payment is considered part of the outstanding principal balance when computing the interest accumulation that also occurs on December 31 of that year. A. Determine the outstanding principal balance on December 31 of the first year that is computed for interest. B. Compute the interest accrued on December 31 of the first year. C. Make a journal entry to record interest accumulated during the first year, but not paid as of December 31 of that first year.

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### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

#### Solutions

Chapter
Section
FindFindarrow_forward

### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 12, Problem 7EB
Textbook Problem
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## McMasters Inc. specializes in BBQ accessories. In order for the company to expand its business, they take out a long-term loan in the amount of $800,000. Assume that any loans are created on January 1. The terms of the loan include a periodic payment plan, where interest payments are accumulated each year but are only computed against the outstanding principal balance during that current period. The annual interest rate is 9%. Each year on December 31, the company pays down the principal balance by$50,000. This payment is considered part of the outstanding principal balance when computing the interest accumulation that also occurs on December 31 of that year.A. Determine the outstanding principal balance on December 31 of the first year that is computed for interest.B. Compute the interest accrued on December 31 of the first year.C. Make a journal entry to record interest accumulated during the first year, but not paid as of December 31 of that first year.

To determine

(a)

Introduction:

A current liability is a debt or obligation due during the operating period of the company. A company has normally one year of operating period.

To compute:

The outstanding principal balance for first year.

### Explanation of Solution

Calculation of outstanding principal:

Outstanding principal=$800,000$

To determine

(b)

Introduction:

The interest on a financial instrument which is earned on it since the first principle of the investment but is not received is termed as accrued interest.

To compute:

The accrued interest.

To determine

(c)

Introduction:

Journal entries record business transactions. These transactions have double effect on accounts such that total of all assets equate with liabilities and equities.

To journalize:

The transactions relating to the payment of principal and accrued interest.

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