Question

Jake Anderson Company had the following transactions involving notes payable. June 1, 2014 Borrows $70,000 from First National Bank by signing a 9-month, 12% note. Dec. 1, 2014 Borrows $90,000 from Sycamore State Bank by signing a 3-month, 10% note. Dec. 31, 2014 Prepares adjusting entries. Mar. 1, 2015 Pays principal and interest to Sycamore State Bank. Mar. 1, 2015 Pays principal and interest to First National Bank. Instructions:

(a) Prepare journal entries for each of the transactions shown above.

(b) What effect do the 12/31/14 entries have on assets, liabilities, and stockholders’ equity?

(c) What amount of interest expense is reported in the 2014 income statement and in the 2015 income statement?

Answer 1

(a)

Journal entries:

(b)

Dec 31, 2014 entry increases interest expense and interest payable. This effect increases liabilities and decreases stockholders' equity by $5,650.

(c)

$5,650 of interest expense is reported in the 2014 income statement and $2,900 ($1,400+$1,500) of interest expense is reported in the 2015 income statement