Question

Journalise the entry with explanation

JULY 1

1)Received $10,000 proceeds from an unsecured, 11%, 5 year, interest only bank loan, due July 1, 2017. The proceeds will be used to pay daily operations of the company. Interest will be paid monthly on the fifth of each month; next payment day is June 5th August 5. 2)Purchased a used truck for $18,000 in exchange for a 3 year zero-interest bearing $25,000 note to Jim's Auto Sales. Adjusting entry for JULY 31FOR 1 AND 2 Record amortization of the zero-interest bearing note.

Answer 1

Journal Entry :-

1. Received of Bank Loan

Date :- 1st July 2017

Bank/ cash A/c Debit $10,000

11 % unsecured Bank loan A/c Credit $ 10,000

(being loan amount received bearing interest 11% payable monthly )

Explanation :-

Golden rule of Accounting :

Debit what Comes in ( in case of Real Account as , cash / bank is a real a/c) debit

Credit the Giver ( as per personal Account rule, we have to pay the bank it will be our liablity and liability always have credit balance.

2. Entry for Purchase of Used Truck.

Truck A/c Debit $ 18,000

Interest Expense Amortisation A/c Debit $ 7,000

Jim's Auto Sales A/c Credit $ 25,000

( Being used truck for $18,000 is Purchased in exchange for a 3 year zero-interest bearing $25,000 note to Jim's Auto Sales.)

Explanation :-

Golden rule of Accounting :

Debit what Comes in ( in case of Real Account ) as , Truck is a real a/c debited

Debit all the expenses and losses ( Interest Expense of $25,000-18,000 = $7,000) Debited

Credit the Giver ( as per personal Account rule, we have to pay $25,000 note to Jim's Auto Sales it will be our liablity and liability always have credit balance.)

Adjustement Entry As on 31st July

1. Interest Expenses accured but not paid to be recorded as expense and for the SAME amount liability needs to be Created.

Interest Expenses for 5 Years Bank Loan A/c Debit $91.67

Interest Expense Payble A/c Credit $91.67

(Being Interest expenses for 5 years bank loan @ 11% per year for one month has been recorded as liability )

Calculation :-

$10,000*11/100 = $1100 for one Year.

For one month = $1100/12 = $91.67

For ENtry 2.

Amortisation of interest expenses for 3 year zero-interest bearing note:

Interest Expenses A/c Debit $ 194.42

Interest Expense Amortisation A/c     Credit $194.42

( Being Interest expenses for one month recognised in Income Statement)

Calculation of Interest expense amount:-

Amount of $ 7,000 to be amortised over 3 years life

so for one year would be = 7000/3 = $2,333

and for one Month = $2,333/12 = $194.42