Midshipmen Company borrows $11,500 from Falcon Company on July 1, 2018. Midshipmen repays the amount borrowed and pays interest of 12% (1%/month) on June 30, 2019.

(1) Record the borrowing for Midshipmen on July 1, 2018.

(2) Record the adjusting entry for Midshipmen on December 31, 2018.

(3) Calculate the 2018 year-end adjusted balances of Interest Payable and Interest Expense (assuming the balance of Interest Payable at the beginning of the year is $0).

Part 1:

Account Debit Credit

Cash $11,500

Notes Payable $11,500

(On 12% Interest)

Part 2:

Account Debit Credit

Interest Expense $690

Interest Payable $690

Part 3:

Interest Expense = $690

Interest Payable = $690

Explanation:

Part 1:

July 1, 2018 Midshipmen borrows $11,500 from Falcon Company.

Account Debit Credit

Cash $11,500

Notes Payable $11,500

(On 12% Interest)

Part 2:

From july 1,2018 to Dec 31,2018, Interest expense has accumulated for 6 months. Since each month the interest is 1% so For each month interest is

($11500 * 1% = $115).

For 6 months Interest expense = $115 * 6

For 6 months Interest expense = $690

General Entry:

Account Debit Credit

Interest Expense $690

Interest Payable $690

Part 3:

Same as Part 2 i. e

From july 1,2018 to Dec 31,2018, Interest expense has accumulated for 6 months. Since each month the interest is 1% so For each month interest is

($11500 * 1% = $115).

For 6 months Interest expense = $115 * 6

For 6 months Interest expense = $690

Interest Expense = $690

Interest Payable = $690