Question

The Eldorado Corporation's controller prepares adjusting entries only at the end of the fiscal year. The following adjusting entries were prepared on December 31, 2018: Debit Credit Interest expense 1,080 Interest payable 1,080 Rent expense 20,000 Prepaid rent 20,000 Interest receivable 150 Interest revenue 150 Additional information: The company borrowed $36,000 on March 31, 2018. Principal and interest are due on March 31, 2019. This note is the company’s only interest-bearing debt. Rent for the year on the company’s office space is $24,000. The rent is paid in advance. On October 31, 2018, Eldorado lent money to a customer. The customer signed a note with principal and interest at 3.0% due in one year. Required: 1. What is the interest rate on the company's note payable? 2. The 2018 rent payment was made at the beginning of which month? 3. How much did Eldorado lend its customer on October 31?

Answer 1

1.

1.

The company borrowed $36,000 on March 31, 2018

Interest expense on note payable = $1,080

Note payable = $36,000

For the year 2018, interest is payable on note for 9 months

Interest expense = Note payable x Interest rate x Time period

1,080 = 36,000 x Interest rate x 9/12

Interest rate = 4%

2.

Annual Rent for the year on the company’s office space is $24,000

Hence, rent expense for 10 months = 24,000 x 10/12

= $20,000

On December 31, 2018, rent expense of $20,000 was recorded. Hence, on December 31, 2018, rent is prepaid for 2 months. Hence,  rent payment was made at the beginning of March 2018.

3.

On October 31, 2018, Eldorado lent money to a customer. The customer signed a note with principal and interest at 3.0% due in one year

Interest revenue of $150 was recorded on December 31, 2018

Interest revenue = Amount lent x Interest rate x Time period

150 = Amount lent x 3% x 2/12

Amount lent = $30,000

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