Martin Associates Borrowed $5000 On April 1, 2010, At 8% Int
Martin Associates Borrowed 5000 On April 1 2010 At 8 Interest Wi
Martin & Associates borrowed $5,000 on April 1, 2010, at 8% interest, with both principal and interest due on March 31, 2011. The assignment involves understanding the appropriate journal entries to accrue interest periodically and to record the final payment, as well as calculating the amount in the interest payable account at a specific date.
Paper For Above instruction
Introduction
Accrual accounting principles require that expenses and liabilities be recognized in the period in which they are incurred, regardless of when cash transactions occur. For Martin & Associates, which borrowed $5,000 on April 1, 2010, at an interest rate of 8% per annum, understanding the appropriate accounting entries to record accrued interest over the year and the final payment is essential for accurate financial statements. This paper discusses the correct journal entries for accruing interest at month-end, calculating the interest payable as of December 31, 2010, and recording the final payment on March 31, 2011.
Journal Entries for Monthly Interest Accrual
Interest on the loan accrues based on the principal and the annual interest rate. The formula for calculating interest accrued over a period is:
Interest = Principal × Rate × Time
Given the annual interest rate of 8%, the monthly interest accrual would be:
Interest per month = Principal × Rate × (1/12)
= $5,000 × 0.08 × (1/12)
= $33.33 approximately.
At the end of each month, Martin & Associates should recognize the interest expense incurred but not yet paid. The appropriate journal entry is a debit to Interest Expense and a credit to Interest Payable, capturing the accrued liability.
Therefore, the correct journal entry for accruing interest at the end of each month is:
C. Dr. Interest expense, Cr. Interest payable
This entry increases interest expense on the income statement and creates a liability on the balance sheet, reflecting the accrued interest owed.
Interest Payable Account Balance as of December 31, 2010
From April 1, 2010, to December 31, 2010, there are 9 full months. The total interest accrued over these months can be calculated as:
Total interest = Monthly interest × Number of months
= $33.33 × 9
= approximately $299.97
In practice, this is rounded to the nearest dollar, resulting in about $300. At December 31, 2010, the firm's interest payable account should reflect this accrued amount.
Therefore, the correct answer is:
A. $300
Final Payment of Interest on March 31, 2011
On March 31, 2011, the firm pays the full amount of interest accrued over the nine months plus the interest for the final three months, as well as settling the principal. The total interest payable over 12 months at 8% on $5,000 is:
Annual interest = $5,000 × 0.08 = $400
Since the interest is paid at the end of the loan period, the total interest accrued over 12 months is $400. The journal entry to record the payment includes removing the accrued interest payable and recognizing the payment, which involves debiting Interest Payable, debiting Interest Expense (if not yet recognized), and crediting Cash.
Given that interest was accrued monthly, the total interest payable accrued over the year is already accumulated in Interest Payable account, which is $400.
The appropriate journal entry is:
A. Dr. Interest expense, Dr. Interest payable, Cr. Cash
This indicates that the firm recognizes the final interest expense, settles the accrued interest liability, and makes cash payment.
Conclusion
Proper accounting for interest involves timely accruals to reflect expenses and liabilities accurately. For Martin & Associates, monthly accruals of interest income to Interest Expense and Interest Payable account are essential. These entries are made at month-end, and the total accrued interest as of December 31, 2010, is approximately $300. Finally, upon payment at the end of the loan term, the firm settles the interest payable, recognizing the total interest expense for the period, ensuring compliance with accrual accounting standards.
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