Question

The Eldorado Corporation's controller prepares adjusting entries only at the end of the fiscal year. The following adjusting entries were prepared on December 31, 2016: Debit Credit Interest expense 7,200   Interest payable 7,200 Rent expense 35,000   Prepaid rent 35,000 Interest receivable 500   Interest revenue 500 Additional information: The company borrowed $120,000 on March 31, 2016. Principal and interest are due on March 31, 2017. This note is the company's only interest-bearing debt. Rent for the year on the company's office space is $60,000. The rent is paid in advance. On October 31, 2016, Eldorado lent money to a customer. The customer signed a note with principal and interest at 6% due in one year. Required: Determine the following: What is the interest rate on the company's note payable? The 2016 rent payment was made at the beginning of which month? How much did Eldorado lend its customer on October 31?

Answer 1

• All working forms part of the answer
• Requirement 1: Interest rate on Company’s Notes payable

A	Company borrowed	$120000
B	Interest expense	$7200
C=B/A	Effective Rate of Interest	6%
D	Borrowed on	31-03-2016
E=April to Dec	No. of month $7200 interest is for	9 months
F=(C/9months) x 12 months	Annual Interest Rate [(6%/9months) x 12 months]	8%

• Requirement 2: Rent payment made on which date.

A	Yearly Rent	$60000
B=A/12	Monthly rent	$5000
C=given	Rent expenses debited	$35000
D=C/B	No. of month rent expense is debited	7 months

Hence, rent payment was made 7 months before Dec 31, 2016.
7 months before year end comes to be 1^st June 2016 on which date the rent payment was made.

• Requirement 3: Amount lent to customer

A	Interest Revenue	$500
B	Lent to customer on	31-10-2016
C=Nov & Dec	No. of months for which interest revenue is recognised	2 months
D=A/C	Monthly Interest	$250
E=Dx12	Yearly Interest would be	$3000
F = given	Yearly Interest rate	6%
G=E/F	Amount Lent to customer	$50,000