ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DO | Page 21

journal entries. Each loan
should be accounted for independent of the other loan. Round
numbers to the nearest dollar.
1. Loan 1 is a 4%, five-year balloon loan for $3,000,000 with interest
due and paid
annually on December 31. Drake records interest annually on
December 31. Drake
incorrectly recorded the journal entry for the Year 1 interest expense
and payment as a
debit to accrued interest payable and a credit to cash. Prepare the net
journal entry
(entries) to correct Year 1 and properly record the interest attributable
to the loan as of,
and for the year ended December 31, Year 2. Account Name Debit
Credit 7 2. Loan 2 is an 8%, $1,000,000 loan with interest due
annually on December 31. Drake
did not record or pay the required Year 2 interest payment until
January 1, Year 3.
Prepare the journal entry (entries) Drake should record at December
31, Year 2.
Account Name Debit Credit 3. On January 1, 2016, Shelley
Corporation signed a ten-year noncancelable lease for
certain machinery. The terms of the lease called for Shelley to make
annual payments
of $100,000 at the end of each year for ten years with title to pass to
Shelley at the end
of this period. The machinery has an estimated useful life of 15 years
and no salvage
value. Shelley uses the straight-line method of depreciation for all of
its fixed assets.
Shelley accordingly accounted for this lease transaction as a capital
lease. The lease
payments were determined to have a present value of $671,008 at an
effective interest
rate of 8%. With respect to this capitalized lease, Shelley should
record interest and
depreciation expense for 2016: