Question

Ontario Resources, a natural energy supplier, borrowed $80 million cash on November 1, 2018, to fund a geological survey. The loan was made by Quebec Banque under a short-term financing arrangement. Ontario Resources issued a 9-month, 12% promissory note with interest payable at maturity. Ontario Resources' fiscal period is the calendar year. Prepare the appropriate adjusting entry for the note by Ontario Resources on December 31, 2018.

Answer 1

Explanation:

The journal entries are shown below:

On December 31, 2018

Interest expense Dr $1,600,000

         To Interest payable $1,600,000

(Being the interest expense is recorded)

The computation is shown below:

= Borrowed amount × rate of interest × number of months ÷ total number of months in a year

= $80,000,000 × 12% × 2 months ÷ 12 month

= $1,600,000

The two month is calculated from November 1 to December 31