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1 November, 08:58

Your company obtains a short term loan on September 1st, 2019 to cover costs to purchase inventory. The loan is for $50,000, the annual interest rate is 8%. The loan is for 7 months and matures on March 31st, 2020. The journal entry on September 1st, 2019 is a Debit to and a Credit to Assuming a December 31 fiscal year end, the journal entry your company does on December 31, 2019 to accrue interest is a Debit and a Credit How much interest expense does your company record on March 31st, 2020 when the loan matures? How much total cash will your company pay back on March 31st, 2020?

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  1. 1 November, 09:14
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    a. Journal Entry on September 1st, 2019:

    Dr: Cash / Bank $50,000

    Cr: Short Term Loan $50,000

    b. Journal Entry to accrue interest on December 31st, 2019 is:

    Dr: Interest Expense $1,333.33

    Cr: Accrues Interest Expense $1,333.33

    c. Interest Expense on March 31st, 2020 is:

    $1,000

    d. The Total cash company will pay back on March 31st 2020:

    52,333.33 (50,000 principal + 2,333.33 interest)

    Explanation:

    b. Annual Interest is $50,000*8% = $4,000 per annum.

    The annual interest rate is prorated for 4 months (Sept 2019 - Dec 2019)

    $4,000 * 4/12 = $1,333.33

    c. Interest expense for next fiscal year up till March 2020 is calculated by prorating annual interest expense for 3 months (Jan 2020 - Mar 2020)

    $4,000*3/12 = $1,000
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