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1. Loan 1 is a 4%, 5-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 to correct Year 1 and properly record the interest attributable to the loan as of and for the year ended December 31, Year 2.

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Answer:

Explanation:

Loan          3000000

Interest        4%

There are three steps to solve correction of errors entries

Step-1         what entry have been made

Step-2         what should be the actual entry.

Step-3         what should be net entry to make it correct.

Step-1         what entry have been made

Accrued Expense payble   3000000*4%         120000

                                       Cash                                            120000

Wrong entry that has been in books. instead of recording expense we have reduced the liability by debiting it.

Step-2         what should be the actual entry.

interest Expense    3000000*4%         120000

                           Cash                                            120000

The correct entry that should have been made

Step-3         what should be net entry to make it correct.

interest Expense    3000000*4%         120000

                       Accrued Expense payble   3000000*4%         120000

Now we have debited the expense that should be recorded and to increase the laibility we have credited the liability that have been decreased in entry 1.

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