Question

The following selected transactions relate to liabilities of Food Emporium whose fiscal year ends on December 31.

January 26 Negotiated a line of credit with City Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $10.60 million at the bank's prime rate.

March 1 Arranged a six-month bank loan of $350,000 with City Bank under the line of credit agreement. Interest at the prime rate of 8% is payable at maturity.

September 1 Paid the 8% note at maturity.

Record the appropriate entries, if any, on January 26, March 1, and September 1.

Answer 1

Answer: Please see explanatory column for answer.

Explanation:

No Journal entry

Date         Amount and explanation                    Debit      Credit

Jan 26            No entry                                           No entry

Reason: this is because even though an agreement was reached in the negotiation,no transaction took place.

Journal to record loan from City Bank

Date         Amount and explanation                    Debit            Credit

March 1    Cash                                                   $350,000

            Notes payable                                                              $350,000

Journal to record payment of  loan with interest  from City Bank from March - September.

Date         Amount and explanation                    Debit            Credit

September 1   Notes payable                            $350,000

                      Interest Expense                           $14,000

                         Cash                                                                   $364,000

calculation: Interest = PxRXT= 350,000 X 8% X 6/12= $14,000