During the fiscal year ended December 31, Swanson Corporation engaged in the fol

Question

During the fiscal year ended December 31, Swanson Corporation engaged in the following transactions involving notes payable: Aug. 6 Borrowed $12,000 from Maple Grove Bank, signing a 45-day, 12 percent note payable. Sept. 16 Purchased office equipment from Seawald Equipment. The invoice amount was $18,000, and Seawald agreed to accept, as full payment, a 10 percent, three-month note for the invoice amount. Sept. 20 Paid Maple Grove Bank the note plus accrued interest. Nov. 1 Borrowed $250,000 from Mike Swanson, a major corporate stockholder. The corporation issued Swanson a $250,000, 15 percent, 90-day note payable. Dec. 1 Purchased merchandise inventory in the amount of $5,000 from Gathman Corporation. Gathman accepted a 90-day, 14 percent note as full settlement of the purchase. Swanson Corporation used a perpetual inventory system. Dec. 16 The $18,000 note payable to Seawald Equipment matured today. Swanson paid the accrued amount on this note and issues a new 30-day, 16 percent note payable in the amount of $18,000 to replace the note that matured. Prepare the adjusting entry needed at Dec. 31, prior to closing the accounts. Use one entry for all three notes (round to the nearest dollar)

Explanation / Answer

Adjusting entry

Interest expense Dr $ 6,437

Interest payable Cr $ 6,437

Working

Aug 6 - Borrowed $ 12,000 @ 12% for 45 days - paid before 31st december - No adjusting entry

Sept 16 - Note payable $18,000 @ 10% for 3 months - due in december get it renewed on dec 16 for $18,000 @ 16% for 30 days - adjusting entry for 14 days of interest = 18,000 X 16% X 14 /365 = $ 110

Nov. 1 - Borrowed $ 250,000 @ 15% for 90 days - Due date after 31st december = Adjusting entry for 61 days of interest = $ 250,000 X 15% X 61 /365 = $ 6,267

Dec 1 - Borrowed $ 5,000 @ 14% for 90 days - Due date after 31st December = Adjusting entry for 31 days of interest = $ 5,000 X 14% X 31 / 365 = $ 60

Total interest expense = $ 110 + $ 6,267 + $ 60 = $ 6,437

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