A Company Lends Its CEO $150,000 For 3 Years At 6% Annually

A Company Lends Its Ceo 150000 For 3 Years At a 6 Annual Interes

A company lends its CEO $150,000 for 3 years at an annual interest rate of 6%. Interest payments are to be made twice a year. The options for each interest payment are $9,000, $4,500, $27,000, or $13, which of the following is true? Additionally, the question includes three other prompts related to accounting and financial procedures: the nature and normal balance of an allowance for doubtful accounts, and an adjusting entry for interest receivable and revenue.

The core of the assignment focuses on calculating the semiannual interest payment on the loan to the CEO and understanding specific accounting principles and transactions related to receivables and interest. This involves applying knowledge of interest calculation, accounting for doubtful accounts, and making proper adjusting entries.

Paper For Above instruction

The scenario presents a corporate lending transaction where a company lends its CEO $150,000 at an annual interest rate of 6%, with interest payments scheduled twice per year. The primary task is to compute the interest payment per period and analyze the underlying accounting principles related to this transaction.

Interest Calculation:

Given the annual interest rate of 6%, the annual interest on $150,000 is calculated as:

\[

\text{Annual Interest} = 150,000 \times 0.06 = 9,000

\]

Since interest payments are made twice a year, each payment covers half of the annual interest:

\[

\text{Semiannual Interest Payment} = \frac{9,000}{2} = 4,500

\]

Therefore, each interest payment should be $4,500. This matches one of the provided options, confirming that the correct answer regarding the interest payment amount is $4,500.

Accounting for Doubtful Accounts:

The question about an allowance for doubtful accounts tests knowledge of the nature of this contra asset account. An allowance for doubtful accounts is established to estimate the amount of receivables that may eventually become uncollectible. It is a contra asset account because it reduces the gross amount of accounts receivable on the balance sheet.

The key point in understanding this account is its normal balance:

- It is a contra asset account, and the normal balance for asset contra accounts is a credit, because it subtracts from the asset account.

Thus, the correct statement following this understanding is:

"An allowance for doubtful accounts is a contra asset account and the normal balance is a credit."

Adjusting Entry for Interest Receivable:

In the scenario involving Post Company and Blue Company, the company lends $40,000 on April 1 with a 4-month, 4.5% interest note. The question involves preparing an adjusting entry as of April 30, when financial statements are prepared.

Interest calculation for the period:

\[

\text{Interest} = \text{Principal} \times \text{Rate} \times \text{Time}

\]

Where:

- Principal = $40,000

- Rate = 4.5% annually or 0.045

- Time = 1 month (April), considering the interest for April only.

Interest for one month:

\[

= 40,000 \times 0.045 \times \frac{1}{12} = 40,000 \times 0.045 \times 0.0833 \approx 150

\]

Since the interest is earned but not yet received in cash, an adjusting entry recognizes interest receivable and interest revenue:

- Debit interest receivable $150

- Credit interest revenue $150

This matches the second option, making it the correct adjusting entry.

Conclusion and Summary:

The calculation confirms that the semiannual interest payment on the loan to the CEO is $4,500. Additionally, understanding the accounting treatments clarifies that an allowance for doubtful accounts is a contra asset with a credit balance, and the adjusting entry on April 30 for interest earned but not received involves debiting interest receivable and crediting interest revenue by $150.

These fundamental principles ensure accurate financial reporting and proper accounting records, aligning with generally accepted accounting principles (GAAP).

References

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  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis: Text and Cases (12th ed.). Wiley.
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  • Higgins, R. C. (2018). Analysis for Financial Management (12th ed.). McGraw-Hill Education.
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  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2016). Corporate Finance (11th ed.). McGraw-Hill Education.
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