Question

Singer Company has a line of credit with United Bank. Singer can borrow up to $420,000 at any time over the course of the 2016 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during the first three months of 2016. Singer agreed to pay interest at an annual rate equal to 1.50 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Singer pays 6.00 percent (4.50 percent + 1.50 percent) annual interest on $79,000 for the month of January.

Month	Amount Borrowed or (Repaid)					Prime Rate for the Month, %
January		$	79,000				4.50
February			118,100				3.50
March			(18,000	)			4.00

Required

Provide all journal entries pertaining to Singer’s line of credit for the first three months of 2016. (Round your final answers to the nearest dollar amount.. If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Event 1: Record the cash borrowed.

Event 2: record the interest paid.

Event 3: Record the cash borrowed.

Event 4: record the interest paid.

Event 5: Record the repayment of the borrowed amount

Event 6: Record the interest expenses paid.

  

Answer 1

Event	General Journal	Debit	Credit
1	Cash	79000
	Notes payable		79000
	(To record the cash borrowed)
2	Interest expense	395
	Cash		395
	(To record the interest paid)
3	Cash	118100
	Notes payable		118100
	(To record the cash borrowed)
4	Interest expense	821
	Cash		821
	(To record the interest paid)
5	Notes payable	18000
	Cash		18000
	(To record the repayment of the borrowed amount)
6	Interest expense	821
	Cash		821
	(To record the interest paid)

Working:

2. Interest expense = ($79000 x 6% x 1/12) = $395

4. Interest expense = ($79000 + $118100) x 5% x 1/12 = $197100 x 5% x 1/12 = $821

6. Interest expense = ($79000 + $118100 - $18000) x 5.50% x 1/12 = $179100 x 5.50% x 1/12 = $821