Homework SourseOn September 30 2017 Coldwater Corporation purchased equipme
On September 30, 2017, Coldwater Corporation purchased equipment for $1,270,000. The equipment was purchased with a $120,000 down payment and a three-year, 3%, $1,150,000 bank loan for the balance. The terms provide for payment of the bank loan with quarterly fixed principal payments of $95,833, plus interest, starting on December 31. Coldwater has a November 30 year end and records adjusting entries annually.
Record the accrual of interest expense on November 30, 2017 and first two instalment payments, on December 31, 2017, and March 31, 2018 assuming that the terms provide for quarterly blended principal and interest payments of $100,569, rather than fixed principal payments of $95,833, plus interest. (Round answers to the nearest whole dollar, e.g. 5,250. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)
Date
Account Titles and Explanation
Debit
Credit
Nov. 30, 2017
Dec. 31, 2017
Mar. 31, 2018
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| Nov. 30, 2017 |
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| Dec. 31, 2017 |
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| Mar. 31, 2018 |
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Solution
Below are the required entries and explaination for each:
Date
Account Titles and Explanation
| Account Titles and Explanation | Debit | Credit | ||||
| Nov. 30, 2017 | Interest Expense | 3,157 | |||||
| Interest payable | 3,157 | ||||||
| For a quarter, interest amount is ( $100,569-$95,833) $4,736 and since the financial year for Coldwater Corp ends on 30 Nov so as of 30 Nov the accrued interest is 2/3 of the quarterly accrued interest which 2/3* $4,736= $3,157. | |||||||
| Dec. 31, 2017 | Interest Payable | 3,157 | |||||
| Loan Account | 97,412 | ||||||
| Cash | 100,569 | ||||||
| Here total cash outflow is of $100,569 which is the quarterly blended payment and since Interest was accrued as of 30 Nov was earlier debited by $3,157 at the actual payment time it is credited as it is the reduction in liability of interest nad same goes for the loan account. | |||||||
| Mar. 31, 2018 | Loan Account | 100,569 | |||||
| Cash | 100,569 | ||||||
| Now the complete quarterly payment is adjusted against loan account as we had only $3,157 interest was accrued till 30 Nov 2017 and the loan account is debit as there is a reduction in liability and cash is credit because cash is outflow. | |||||||
