The following selected transactions relate to liabilities of United Insulation C
ID: 2530680 • Letter: T
Question
The following selected transactions relate to liabilities of United Insulation Corporation. United's fiscal year ends on December 31 2018 Jan. 13 Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon bank approval. The Feb. 1 Arranged a three-month bank loan of $6.2 million with Parish Bank under the line of credit agreement. Interest May 1 Paid the 13% note at maturity. amount available under the line of credit is $27.0 million at the bank' s prime rate at the prime rate o 133 Was payable at maturity Dec. 1 Supported by the credit line, issued $14.9 million of commercial paper on a nine-month note. Interest was discounted at 133uance at a 12% di3count rate. 31 Recorded any necessary adjusting entry (s) 2019 Sept. 1 Paid the commercial paper at maturity. Required Prepare the appropriate journal entries through the maturity of each liability 2018 and 2019. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Do not round intermediate calculations. Enter your answers in whole dollars.) View transaction list Journal entry worksheet 4 Record necessary adjusting entry to accrue interest on December 31 Note: Enter debits before credits Date General Journal Debit Credit Dec 31, 2018Explanation / Answer
Solution:
Date
General Journal
Debit ($)
Credit ($)
Dec 31 , 2018
Interest expense (WN)
149,000
Discount on notes payable
149,000
Working Note (WN):
Effective interest rate
= (Discount on notes payable*- Cash difference**) X Time period X 100
= ($1,341,000 ÷ $13,559,000) × 12/9 X 100
=13.1868%
So, properly, interest should be recorded at that rate times the outstanding balance times one-twelfth of a year:
Interest expense
= ($13,559,000 × 13.1868% × 1/12)
= $ 149,000
Discount on notes payable = $ 149,000
*Discount on notes payable
=Face value X Interest rate X Time period
= ($14,900,000 × 12% × 9/12
= $ 1,341,000
Note: $ 14.9 million can be written as $14,900,000
**Cash (Difference)
= $ 14,900,000-$ 1,341,000
=$ 13,559,000
Alternative and Simple method
Interest Expense = Face value X Interest rate X Time period
=$ 14,900,000 X 12% X 1/12 = $ 149,000
Note: I am submitting answer only for journal entry of December 31, 2018 as requested by you. If you need any help. Leave a message.
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Date
General Journal
Debit ($)
Credit ($)
Dec 31 , 2018
Interest expense (WN)
149,000
Discount on notes payable
149,000