Question

Singer Company has a line of credit with United Bank. Singer can borrow up to $454,000 at any time over the course of the Year 1 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during the first three months of Year 1. Singer agreed to pay interest at an annual rate equal to 2.00 percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly balance. For example, Singer pays 6.25 percent (4.25 percent + 2.00 percent) annual interest on $81,000 for the month of February. Month Amount Borrowed or (Repaid) Prime Rate for the

Month

January $ 81,000 4.25 %

February 124,200 3.25

March (22,800 ) 3.75

a) Required Provide all journal entries pertaining to Singer’s line of credit for the first three months of Year 1.

Answer 1

Month	Amount borrowed (repaid)	Balance end of month	Interest rate	interest expense
January	$81,000	81,000	6.25% (4.25 +2)	422 (81,000 ×6.25% /12)
February	124,200	205,200 (81000+ 124,200)	5.25% (3.25 +2)	898 (205,200 ×5.25% /12)
March	(22,800)	182,400 (205,200 -22,800)	5.75% (3.75 +2)	874 (182,400 ×5.75% /12)

a)

Date	Accounts Titles and Explanations	Debit	Credit
January 1	cash	$81,000
	Line of credit payable		$81,000
	(To record line of credit payable)
January 31	Interest expense	$422
	Cash		$422
	(To record interest expense)
February 1	cash	$124,200
	Line of credit payable		$124,200
	(To record line of credit payable )
February 28	Interest expense	$898
	Cash		$898
	(To record interest expense )
March 1	Line of credit payable	$$22,800
	Cash		$22,800
	(To record line of credit payable )
March 31	Interest expense	$874
	Cash		$874
	(To record interest expense )