Ref-3: On 1St March, 2023, the company borrowed $120,000 cash from the local bank on a one-year, 6% bank loan, and the transaction was recorded properly. The interest expense incurred is payable to the bank at the end of 12 months. What is the required adjusting journal entry for the 2023 30th June financial year end in relation to the interest expense incurred?
Question
Ref-3: On 1St March, 2023, the company borrowed $120,000 cash from the local bank on a one-year, 6% bank loan, and the transaction was recorded properly. The interest expense incurred is payable to the bank at the end of 12 months. What is the required adjusting journal entry for the 2023 30th June financial year end in relation to the interest expense incurred?
Solution
The adjusting journal entry for the interest expense incurred would be as follows:
Step 1: Calculate the interest expense for the period from 1st March to 30th June. This is a period of 4 months. The annual interest rate is 6%, so the monthly interest rate is 6% divided by 12, which is 0.5%.
Step 2: Multiply the principal amount of the loan ($120,000) by the monthly interest rate (0.5%) and then by the number of months (4). This gives you the interest expense for the period.
2,400
Step 3: Record the interest expense in the company's general ledger. The adjusting journal entry would be:
Debit: Interest Expense 2,400
This entry recognizes the interest expense incurred for the period and the corresponding liability (interest payable) that the company owes to the bank.
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