Chapter 10, Problem 3AP

a.

To determine

Prepare journey to record the given transactions.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Liabilities: The claims creditors have over assets or resources of a company are referred to as liabilities. These are the debt obligations owed by company to creditors. Liabilities are classified on the balance sheet as current liabilities and long-term liabilities.

Prepare journal entry to record borrowing of $12,000 from Bank M, signing a 45-day, 12 percent note payable.

Date	Accounts title and explanation		Debit ($)	Credit ($)
August 6	Cash		12,000
		Notes payable		12,000
	(Record the  borrowing of $12,000 from Bank M, signing a 45-day promissory  note)

(Table 1)

• Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $12,000.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $12,000.

Prepare journal entry to record purchased office equipment from Company S.

Date	Accounts title and explanation		Debit ($)	Credit ($)
September 16	Office equipment		18,000
		Notes payable		18,000
	(Record the purchase of equipment)

(Table 2)

• Office equipment is an asset and there is an increase in the value of an asset. Hence, debit the office equipment by $18,000.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $18,000.

Prepare journal entry to record the payment made on bank M’s note along with accrued interest.

Date	Accounts title and explanation		Debit ($)	Credit ($)
September 20	Note payable		12,000
	Interest Expense		180
		Cash		12,180
	(Record the payment of Bank M’s  note with accrued interest)

(Table 3)

• Notes payable is a liability and there is decrease in the value of liability. Hence, debit the notes payable by $12,000.
• Interest expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the interest expense by $180.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the office equipment by $12,180.

Prepare journal entry to record borrowing of $250,000 from Company M.

Date	Accounts title and explanation		Debit ($)	Credit ($)
November 1	Cash		250,000
		Notes payable		250,000
	(Record the  borrowing of $250,000 from Company M)

(Table 4)

• Cash is an asset and there is an increase in the value of an asset. Hence, debit the cash by $250,000.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $250,000.

Prepare journal entry to record purchase of merchandise inventory on account from Corporation G.

Date	Accounts title and explanation		Debit ($)	Credit ($)
December 1	Merchandise inventory		5,000
		Notes payable		5,000
	(Record the purchase of merchandise inventory  on account)

(Table 5)

• Merchandise inventory is an asset and there is an increase in the value of an asset. Hence, debit the merchandise inventory by $5,000.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $5,000.

Prepare journal entry to record the payment pf note payable to Company S along with the accrued interest and issued a new 30-day, 16 percent note payable in the amount of $18,000 to replace the note that matured.

Date	Accounts title and explanation		Debit ($)	Credit ($)
September 20	Note payable		18,000
	Interest Expense (2)		450
		Cash		450
		Notes payable		18,000
	(Record the payment made to Company S on  note along with the interest and issued a 30-day, 16%, renewal note )

(Table 6)

• Notes payable is a liability and there is decrease in the value of liability. Hence, debit the notes payable by $18,000.
• Interest expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the interest expense by $450.
• Cash is an asset and there is a decrease in the value of an asset. Hence, credit the office equipment by $450.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $18,000.

Working Notes:

Calculate the amount of interest expense.

$\begin{array}{c}\text{Interest Expense = Principal Amount }\times \text{Interest Rate }\times \text{Time period }\\ \text{=\$12,000}\times \text{12\%}\times \frac{45}{360}\\ =\$180\end{array}$

Calculate the value of interest expense that is to be paid to Company S on purchase of office equipment.

$\begin{array}{c}\text{Interest Expense = Principal Amount }\times \text{Interest Rate }\times \text{Time period }\\ \text{=\$18,000}\times \text{10\%}\times \frac{3(October-December)}{12}\\ =\$450\end{array}$

b.

To determine

Prepare the adjusting entry needed at December 31, prior to closing the accounts.

Explanation of Solution

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Prepare the adjusting entry needed at December 31, prior to closing the accounts.

Date	Accounts title and explanation		Debit ($)	Credit ($)
December 31	Interest expense		6,428
		Interest payable		6,428
	(Record interest accrued on notes payable)

(Table 7)

• Debit to increase the interest expense account (Increase in interest expense decreases stockholders’ equity account).
• Credit to increase the interest payable account (liability account).

Working Note:

Calculate the interest accrued on notes payable.

(Table 8)

c.

To determine

Provide reason to explain why the new 30-day note payable to Company S pays 16 percent interest instead of the 10 percent rate charged on the September 16 note.

Explanation of Solution

The note made by Company S on September 16, is to be collected in full amount by December 16. The interest rate has increased on the new note, due to the risk involved in collecting $18,000 in 30 days along with the accrued interest that is in due.