Chapter 11, Problem 1GLP

To determine

Notes Payable:

It is a negotiable debt instrument used to borrow money for the business operation purpose for specified period of time with certain interest.

To determine:

Prepare journal entries related to accounts and notes payable. Compute both amount and timing of interest expense for each note. Prepare the subsequent period journal entries related to accrued interest.

Answer to Problem 1GLP

Solution:

Date	General Journal	Debit	Credit
2014
Apr. 20	Merchandise Inventory	$40,250
	Accounts Payable − Locust		$40,250
May 19	Accounts Payable − Locust	$40,250
	Cash		$5,250
	Notes Payable − Locust		$35,000
July 8	Cash	$80,000
	Notes Payable − National Bank		$80,000
Aug. 17	Notes Payable - Locust	$35,000
	Interest Expense	$875
	Cash		$35,875
Nov. 5	Notes Payable − National Bank	$80,000
	Interest Expense	$2,400
	Cash		$82,400
Nov. 28	Cash	$42,000
	Notes Payable − Fargo Bank		$42,000
2015
Jan. 27	Notes Payable − Fargo Bank	$42,000
	Interest Expense	$252
	Interest Payable	$308
	Cash		$42,560

Accounts Payable Ledger

Date	Debit	Credit	Balance
2015
Apr. 20		$40,250	$40,250
May. 19	$40,250		$0
Dec. 31			$0

Notes Payable Ledger

Date	Debit	Credit	Balance
2014
May 19		$35,000	$35,000
July 8		$80,000	$115,000
Aug. 17	$35,000		$80,000
Nov. 5	$80,000		0
Nov. 28		$42,000	$42,000
Dec.31			$42,000
2015
Jan. 27	$42,000		0

Amount and timing of Interest Expense for each note
Notes	Notes Date	Term	Maturity	Amount
Locust	May 19	90 days	August 17	$875
National Bank	July 8	120 days	November 5	$2,400
Fargo Bank	November 28	60 days	January 27	$560

Journal entry to record accrued interest on note issued to Fargo Bank at December 31, 2014.

Date	General Journal	Debit	Credit
2014
Dec. 31	Interest Expense	$308
	Interest Payable		$308

Explanation of Solution

Explanation:

	Locust	National Bank	Fargo Bank
Date of issue	May 19	July 8	November 28
Terms of Notes	90 days	120 days	60 days
Maturity date	August 17	November 5	January 27

Computation of interest due at maturity of each three notes

Interest = Principal X Rate of interest X Time

  $\begin{array}{l}Locust=\$35,000X10\%X\frac{90Days}{360Days}=\$875\hfill \\ \hfill \\ NationalBank=\$80,000X9\%X\frac{120Days}{360Days}=\$2,400\hfill \\ \hfill \\ FargoBank=\$42,000X8\%X\frac{60Days}{360Days}=\$560\hfill \end{array}$

Accrued Interest expense for Fargo Bank
  $AccruedInterestExpensefor2014=\$42,000X8\%X\frac{33Days}{360Days}=\$308$

Interest expense for Fargo Bank in 2015

Total Interest Expense	$560
Less: Accrued interest expense in 2014	$308
Interest expense to be recorded in 2015	$252

Conclusion

Conclusion:

It is concluded that the maturity date of Locust, National Bank and Fargo Bank notes are August 17, November 5 and January 27 respectively. The interest due at the maturity of Locust is $875, National Bank; 2,400 and Fargo Bank is $560.