On June 1, Pina Colada Corp. borrows $111,000 from First Bank on a 6-month, $111,000, 8% note. Required:
a. Prepare the entry on June 1.
b. Prepare the adjusting entry on June 30.
c. Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30.

June 1

Cash $111,000 (debit)

Note Payable $111,000 (credit)

June 30

Interest expense $1,480 (debit)

Note Payable $1,480 (credit)

Nov 30

Note Payable $119,800 (debit)

Cash $119,800 (credit)

Explanation:

June 1

Recognize the Cash Asset received and a liability Note Payable

June 30

Interest for 1 month has accrued and this is calculated as :

Interest Expense = $111,000 × 8% × 1/6

                            = $1,480

Nov 30

Total Interest is capitalized to the Note Payable and the full amount is repaid

Total Interest = $111,000 × 8%

                      = $8,800

Ballon Amount = $111,000 + $8,800

                         = $119,800

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