Explanation Liabilities: Liabilities are debt and obligations of a business. These are the claims against the resources that a business owes to outsiders of the company. Liabilities may be Current liabilities, and Long-term liabilities. Examples: Creditors, Bills payable, Bank overdraft, Salaries and wages payable, and Notes payable. Short-term notes payable: Short-termnotes payable is a written promise made by the business to pay a certain amount on a future date, with certain percentage of interest within a year. It is generally issue by the company to meet its short-term financing needs. Journal entry to record theissuance of notes payable on October 1, 2014: Date Accounts and Explanation Post Ref Debit ($) Credit ($) 2014 Cash 50,000 October 1 Short-Term Notes Payable 50,000 (To record issue of notes payable) Table (1) Cash is an asset and it is increased. So, debit it by $50,000. Short-term notes payable is a liability and it is increased. So, credit it by $50,000. Journal entry to recordthe interest accrual on the note on December 31, 2014: Date Accounts and Explanation Post Ref Debit ($) Credit ($) 2014 Interest Expense 750 December 31 Interest Payable 750 (To record the accrual of interest due on note) Table (2) Interest expense is an expense and it decreases the equity value. So, debit it by $750. Interest payable is a liability and it is increased. So, credit it by $750. Working note: Calculate interest expense as below: Interest expense = Principal amount × Rate of interest × Time = $ 50 , 000 × 6 % × 3 12 = $ 750 Journal entry for payment of interest on March 31, 2015: Date Accounts and Explanation Post Ref Debit ($) Credit ($) 2015 Interest Payable 750 March 31 Interest Expense 750 Cash 1,500 (To record the payment of interest) Table (3) Interest Payable is a liability and it is decreased

5th Edition

ISBN: 9780078025914

Author: Fred Phillips Associate Professor, Robert Libby, Patricia Libby

Publisher: McGraw-Hill Education

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Chapter 10, Problem 10.1CC

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To prepare: Journal entry to record the entry from issuance of the note to its maturity.

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Journal entry to record the entry from issuance of the note to its maturity.

Solution Summary: The author explains that Liabilities are the claims against the resources that a business owes to outsiders of the company.

To prepare: Journal entry to record the entry from issuance of the note to its maturity.

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Chapter 10 Solutions