Question

On April 1st, the company borrows $30,000 from the bank and signs a note. The company plans on repaying the note five years later. The bank charges 6% annual interest.

On December 31st (the adjusting entry):

The debit should be:

The credit should be:

The amount should be:

The company purchases equipment for $60,000 on August 1, 2016. The equipment will be useful for 10 years. The company records an adjusting entry for depreciation at the end of each year.

On December 31, 2016 (the adjusting entry):

The debit should be:

The credit should be:

The amount should be:

Answer 1

• Answer 1

Amount borrowed $ 30,000
Borrowed on 1^st April
Interest rate (annual) = 6%

Annual Interest = 30000 x 6% = $ 1,800
Period from 1^st April to 31^st December = 9 months
9 months interest expense = 1800 x 9 months/12 months = $ 1,350

On 31^st December:

The debit should be: Interest expense account
The credit should be: Interest payable account
The amount should be: $ 1,350

• Answer 2

Cost of Equipment $60,000
Purchased on Aug 1, 2016
Estimated Life = 10 years

Annual (12 months depreciation) = 60000/10 = $ 6,000

Period from 1^st Aug 2016 to 31^st Dec 2016 = 5 months.
5 months depreciation expense = 6000 x 5/12 = $ 2,500

On December 31, 2016:

The debit should be: Depreciation expense (Equipment)
The credit should be: Accumulated Depreciation (Equipment)
The amount should be: $ 2,500