Ontario Resources, a natural energy supplier, borrowed $80 million cash on November 1, 2013, to fund a geological survey. The loan was made by Quebec Banque under a short-term credit line. Ontario Resources issued a 9-month, 12% promissory note with interest payable at maturity. Ontario Resources' fiscal period is the calendar year.

Required: 1. Prepare the journal entry for the issuance of the note by Ontario Resources.
2. Prepare the appropriate adjusting entry for the note by Ontario Resources on December 31, 2013. Show calculations.
3. Prepare the journal entry for the payment of the note at maturity. Show calculations.

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andromache andromache · Answer 1 · 2019-12-21T11:21:05+01:00

Answer:

Explanation:

1. Cash A/c Dr $80,000,000

To Notes payable A/c $80,000,000

(Being note is issued for cash)

2. Interest expense A/c Dr $1,600,000

To Interest payable A/c $1,600,000

(Being accrued interest adjusted)

The computation is shown below:

= Principal × rate of interest × number of months ÷ (total number of months in a year)

= $80,000,000 × 12% × (2 months ÷ 12 months)

= $1,600,000

The two month is calculated from November 1 to December 31

3. Interest expense A/c Dr $5,600,000

Interest payable A/c Dr $1,600,000

Notes payable A/c Dr $80,000,000

To Cash A/c $8,720,000

(Being cash is paid on maturity)

The computation is shown below:

= Principal × rate of interest × number of months ÷ (total number of months in a year)

= $80,000,000 × 12% × (7 months ÷ 12 months)

= $5,600,000

Out of 9 months the two month is accrued and the remaining is debited to interest expense account