Information for Problems 1 and 2:
Drake, Inc has two loans recorded on its books. Loan 1 was obtained on January 1, Year 1, and Loan 2 was entered into on January 1, Year 2. Drake's year end is December 31. For the two situations related to the loans below, prepare the appropriate journal entries. Each loan should be accounted for independent of the other loan. Round numbers to the nearest dollar.
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.
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.