Question

Firm A borrows $1,000,000 on a 2 month note. The annual interest rate is 18% and...

Firm A borrows $1,000,000 on a 2 month note. The annual interest rate is 18% and interest stated separately from the face amount.

A) Please give the borrowers journal entry for the above transaction

B) Please explain how the lender's Statement of Cash Flow is impacted by the journal entry above.

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Answer #1

A:

A JOURNAL ENTRY DR CR
1 Cash-Dr 1000000
Notes payable 1000000
Amount borrowed
2 Interest expense- Dr 30000
Interest payable 30000
Interest payable = 1000000*18%*2/12

B: The lender will first have a cash outflow of one million dollars. Thereafter his cash flows will increase by $300000 when the borrower pays the interest amount. Finally there will be cash inflow of $1000000 when the original amount is returned.

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