nambivar
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Joined: 14 Nov 2010
Location: United States
Online Status: Offline
Posts: 144
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| Posted: 27 Mar 2016 at 22:27 | IP Logged
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1. On receiving the amount of 1 mio , the entries would be dr. cash [or bank], cr. notes payable;
on the balance sheet date, the interest would be calculated at 22500 and the journal entries would be dr. interest expense 22500, dr. notes payable 241,700 , cr. cash[or bank] 264200;
on the 2nd, 3rd and 4th repayment dates also accounts debited/ credited would be as above and the amounts as already calculated and explained.
2. your arriving at 1.09 mio would be right only if the problem stated it as a bullet payment of the entire borrowed amount at one stroke at the end of one year from borrowing;
3. the problem says 'four quarterly payments of [implying equal amount]' ; it could have said ''3 quarterly payments of 264200 and the last to extinguish the outstanding in the notes payable account''; this would be too wordy/ confusing although technically correct;
4. in solving such problems, may be it would be a good idea to think that the motive for the cpa candidate should be to work out the solution and choose the correct answer; if we had the time we can certainly find out in this problem whether the interest rate should not be 9 but some other % or the payment should not be 264200 but some other amount, four times of which should have been equal to the total interest paid + the principal borrowed.
Hope this clarifies.
I have passed all the 4 papers of the CPA exam, just by the way.
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Topic: Notes payable
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