Question

A company borrowed $40,000 on June 30, 2016 from a bank. The bank is charging an interest rate of 10% annually. Interest is compounded quarterly. If the loan is due on September 30, 2017, how many times will the company record a journal entry for Interest Expense over the whole loan period?

Answer 1

Journal Entry for expenses shall be recorded at quarterly rest as interest is compunded quarterly

So the journal entry would be

Interest Expenses XXX

Loan Payable XXX

We have to credit loan payable as interest is compunded quarterly, so we have to charge interest next time on outstanding loan amount including interest there on

Now there is 5 interest period in this loan i.e. 30th september 2016, 31st december 2016, 31st match 2017,30th june 2017 & 30th september 2017

So we have to record a journal entry for Interest Expense over the whole loan period for 4 times i.e. 30th september 2016, 31st december 2016, 31st match 2017,30th june 2017, as for the last period we will record the entry as

Interest Expenses XXX

Loan Payable XXX

Cash XXX

So we have to record a journal entry for Interest Expense over the whole loan period for 4 times.

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