Question

Mohammed LLC is a growing consulting firm. The following transactions take place during the current year.

1. On June 10, Mohammed borrows $270,000 from a bank to cover the initial cost of expansion. Terms of the loan are payment due in four months from June 10, and annual interest rate of 5%.
2. On July 9, Mohammed borrows an additional $100,000 with payment due in four months from July 9, and an annual interest rate of 12%.
3. Mohammed pays their accounts in full on October 10 for the June 10 loan, and on November 9 for the July 9 loan.

Record the journal entries to recognize the initial borrowings, and the two payments for Mohammed.

Answer 1

The journal entry will be as follows

June 10

Cash Debit. 270,000

Loan/Notes Payable Credit. 270,000

( To record the receipt of amount)

July 9

Cash Debit. 100,000

Loan/Notes Payable Credit. 100,000

( To record the receipt of amount)

October 10

Loan/Notes payable Debit. 270,000

Interest expense Debit. 4,500

Cash Credit. 274,500

( To record payment of loan)

November 9

Loan/Notes payable Debit. 100,000

Interest expense Debit. 4,000

Cash Credit. 104,000

( To record payment of loan)

Interest Calculation for June 10 loan

=270,000 x 5% x 4 /12

=4,500

Interest Calculation for July 9 loan

=100,000 x 12% x 4/12

= 4,000