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Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

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EXERCISE 10-2

Purpose: (L.O. 2) This exercise will review the journal entries involved for an interest-bearing note payable.

On November 1, 2014, Bono Company borrowed $80,000 from National Bank and signed a note stipulating that $80,000 was to be repaid in 6 months with interest at 12%. Bono Company adjusts its accounts and prepares financial statements annually on December 31. (Reversing entries discussed in the Appendix to Chapter 4 are not used.)

Instructions

  • (a) Prepare the journal entry on November 1, 2014, to record the loan.
  • (b) Prepare the adjusting entry on December 31, 2014.
  • (c) Prepare the journal entry at maturity (May 1, 2015).
  • (d) Determine the total financing cost (interest expense) for the six-month period.

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