a) The journal entry on June 1 for Sheridan Company Litd. is as follows:
June 1:
Debit Cash $162,000
Credit Note Payable (Acme Bank) $162,000
b) The adjusting entry on June 30 is as follows:
June 30:
Debit Interest Expense $540
Credit Interest Payable (Acme Bank) $540
c) The journal entry at maturity on December 1 is as follows:
December 1:
Debit Note Payable (Acme Bank) $162,000
Debit Interest Payable (Acme Bank) $3,240
Credit Cash $165,240
d) The total financing cost (interest expense) was $3,240.
The finance cost refers to the interest expense that Sheridan Company Ltd. must pay to Acme Bank for using the credit from the 4% note.
Note Payable = $162,000
Interest rate = 4%
Maturity period = 6%
Monthly finance cost = $540 ($162,000 x 4% x 1/12)
Total finance cost = $3,240 ($162,000 x 4% x 6/12)
Thus, the finance cost is computed as the principal multiplied by 4% multiplied by 6/12 months.
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