Chapter 10, Problem 10.2AP

(a)

To determine

Liabilities

Liabilities are an obligation of the business to pay to the creditors in future for the goods and services purchased on account or any for other financial benefit received. It can be current liabilities or a non-current liabilities depending upon the time period in which it is paid.

Current liability

Current liability is an obligation that the companies need to pay from the remaining current assets or creation of other current liabilities within a fiscal year or the operating cycle whichever is higher.

Notes payable

Notes Payable is a written promise to pay a certain amount on a future date, with certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs.

To Prepare: The journal entry to record the issuance of 6% notes payable to purchase of an inventory on September 1, 2017.

Explanation of Solution

Prepare the journal entry to record the issuance of 6% notes payable to purchase of an inventory on September 1, 2017 as shown below:

Date	Account title and Description	Debit	Credit
Sept. 1, 2017	Inventory	$12,000
	6% Notes payable		$12,000
	(To record the 6% notes payable for purchases of an inventory of Corporation E)

Table (1)

Description:

• Inventory is a current asset, and increased. Therefore, debit inventory account for $12,000.
• 6% Notes payable is a current liability and increased. Therefore, credit 6% notes payable account for $12,000.

To determine

To Prepare: The journal entry to record the accrued interest expense of 6% notes payable on September 30, 2017.

Explanation of Solution

Prepare the journal entry to record the accrued interest expense of 6% notes payable on September 30, 2017 as shown below:

Date	Account title and Description	Debit	Credit
Sept. 30, 2017	Interest expense (1)	$60
	Interest payable		$60
	(To record the accrued interest expense of 6% notes payable for Corporation E)

Table (2)

Working note:

Calculate interest expense on 30^th September 2017 of Corporation E as shown below:

  $\begin{array}{c}\text{Interest expense = 6\% Notes payable }\times \text{Interest rate }\times \text{Time period}\\ \text{=}\text{\$12,000}\times \text{6\%}\times \frac{1\text{Month}}{12\text{Months}}\\ =\$60\end{array}$ (1)

Description:

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit inventory account for $60.
• Interest payable is a current liability and decreased. Therefore, credit interest payable account for $60.

To determine

To Prepare: The journal entry to record the issuance of 8% notes payable to purchase equipment on October 1, 2017.

Explanation of Solution

Prepare journal entry to record the issuance of 8% notes payable to purchases equipment on October 1, 2017as shown below:

Date	Account title and Description	Debit	Credit
Oct. 1, 2017	Equipment	$16,500
	8% Notes payable		$16,500
	(To record the 8% notes payable to purchase of an equipment for Corporation E)

Table (3)

Description:

• Equipment is a fixed asset, and increased. Therefore, debit equipment account for $16,500.
• 8% Notes payable is a current liability and increased. Therefore, credit 8% notes payable account for $16,500.

To determine

To Prepare: The journal entry to record the accrued interest expense of 6% notes payable and 8% notes payable  on October 31, 2017.

Explanation of Solution

Prepare the journal entry to record the accrued interest expense of 6% notes payable and 8% notes payable on October 31, 2017 as shown below:

Date	Account title and Description	Debit	Credit
Oct. 31, 2017	Interest expense (3)	$170
	Interest payable		$170
	(To record the accrued interest expense of 6% notes payable for Corporation E)

Table (4)

Working note:

Calculate interest expense on 31^st October 2017 of Corporation E as shown below:

  $\begin{array}{c}\text{Interest expense = 6\% Notes payable }\times \text{Interest rate }\times \text{Time period}\\ \text{=}\text{\$12,000}\times \text{6\%}\times \frac{1\text{Month}}{12\text{Months}}\\ =\$60\end{array}$ (1)

Calculate interest expense on 31^st October 2017 of Corporation E as shown below:

  $\begin{array}{c}\text{Interest expense = 8\% Notes payable }\times \text{Interest rate }\times \text{Time period}\\ \text{=}\text{\$16,500}\times 8\text{\%}\times \frac{1\text{Month}}{12\text{Months}}\\ =\$110\end{array}$ (2)

Calculate total interest expenses as on 31^st October 2017 of Corporation E as shown below:

  $\begin{array}{c}\text{Interest expense =}\$60+\$110\\ =\$170\end{array}$ (3)

Description:

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit inventory account for $170.
• Interest payable is a current liability and decreased. Therefore, credit interest payable account for $170.

To determine

To Prepare: The journal entry to record the issuance of 6% notes payable to purchases Vehicle on November 1, 2017.

Explanation of Solution

Prepare journal entry to record the issuance of 8% notes payable to purchase vehicle on November 1, 2017as shown below:

Date	Account title and Description	Debit	Credit
Nov. 1, 2017	Vehicle	$34,000
	6% Notes payable		$26,000
	Cash		$8,000
	(To record the 8% notes payable to purchase of an equipment for Corporation E)

Table (5)

Description:

• Vehicle is a fixed asset, and increased. Therefore, debit Vehicle account for $34,000.
• 6% Notes payable is a current liability and increased. Therefore, credit 6% notes payable account for $26,000.
• Cash is a current asset and decreased. Therefore, credit cash account for $8,000.

To determine

To Prepare: The journal entry to record the accrued interest expense of 6% notes payable on November 31, 2017.

Explanation of Solution

Prepare the journal entry to record the accrued interest expense of 6% notes payable on November 31, 2017 as shown below:

Date	Account title and Description	Debit	Credit
Nov. 31, 2017	Interest expense (5)	$300
	Interest payable		$300
	(To record the accrued interest expense for Corporation E)

Table (6)

Working note:

Calculate interest expense on 31^st October 2017 of Corporation E as shown below:

  $\begin{array}{c}\text{Interest expense = 6\% Notes payable }\times \text{Interest rate }\times \text{Time period}\\ \text{=}\text{\$26,000}\times \text{6\%}\times \frac{1\text{Month}}{12\text{Months}}\\ =\$130\end{array}$ (4)

Calculate total interest expenses as on 31^st November 2017 using working note (3) and (4) of Corporation E as shown below:

  $\begin{array}{c}\text{Interest expense =}\$130+\$170\\ =\$300\end{array}$ (5)

Description:

• Interest expense is a component of stockholders’ equity, and decreased it. Therefore, debit inventory account for $300.
• Interest payable is a current liability and decreased. Therefore, credit interest payable account for $300.

To determine

To Prepare: The journal entry to record the payment of principal and interest on December 1, 2017.

Explanation of Solution

Prepare journal entry to record the payment of principal and interest on December 1, 2017as shown below:

Date	Account title and Description	Debit	Credit
Dec. 1, 2017	6% Notes payable	$12,000
	Interest payable (6)	$180
	Cash		$12,180
	(To record the 6% notes payable to purchase of an equipment for Corporation E)

Table (7)

Working note:

Calculate interest payable for Corporation E as shown below:

$\begin{array}{c}\text{Interest payable =}\text{6\% Notes payable }\times \text{Interest rate }\times \text{Time period}\\ \text{=}\$12,000\times 6\%\times \frac{3\text{Months}}{12\text{Months}}\\ =\$180\end{array}$ (6)

Description:

•  6% notes payable is a current liability, and decreased. Therefore, debit notes payable account for $12,000.
• Interest payable is a current liability and decreased. Therefore, debit interest payable account for $180.
• Cash is a current asset and decreased. Therefore, credit cash account for $12,180.

To determine

To Prepare: The journal entry to record the payment of principal and interest on December 31, 2017.

Explanation of Solution

Prepare journal entry to record the payment of principal and interest on December 31, 2017as shown below:

Date	Account title and Description	Debit	Credit
Dec. 31, 2017	Interest expense (7)	$240
	Interest payable		$240
	(To record the accrued interest expenses for Corporation E)

Table (8)

Working note:

Calculate interest expenses for Corporation E on 31^st December 2017 using working note (2) and (4) as shown below:

  $\begin{array}{c}\text{Interest expenses = \$110}\text{+\$130}\\ \text{=}\text{\$240}\end{array}$ (7)

(b)

To determine

To Compute: The T-Accounts of Notes payable, Interest payable and Interest expense of Corporation E.

Explanation of Solution

Calculate the T-Accounts of Notes payable, Interest payable and Interest expense of Corporation E as shown below:

Notes Payable
12/1		$12,000	9/1		$12,000
			10/1		$16,500
			11/1		$26,000
			12/31	Bal.	$42,500

Table (1)

Interest Payable
12/1		$180	9/30		$60
			10/31		$170
			11/30		$300
			12/31		$240
			12/31	Bal.	$590

Table (2)

Interest Expense
9/30		$60
10/31		$170
11/30		$300
12/31		$240
12/31	Bal.	$770

Table (3)

Description:

Normal balance of assets account, expenses, and losses account are debit balance. Hence, a debit increases these accounts and credit decreases these accounts.

Normal balance of liabilities account, capital account, revenue account and gains are credit balance. Hence, a debit decreases these accounts and credit increases these accounts.

(c)

To determine

To Compute: The balance sheet presentation of notes payable and interest payable of Corporation E on December 31, 2017.

Explanation of Solution

Calculate the balance sheet presentation of notes payable and interest payable of Corporation E on December 31, 2017 as shown below:

Figure (1)

(d)

To determine

To Identify: The total interest expense of Corporation E using T-Accounts.

Explanation of Solution

Calculate total interest expense of Corporation E using T-Accounts as shown below:

Interest Expense
9/30		$60
10/31		$170
11/30		$300
12/31		$240
12/31	Bal.	$770

Table (3)

Therefore, total interest expense of Corporation E is $770.