Chapter 17, Problem 13SPB

To determine

Prepare journal entry to record the following transactions of MR Shop.

Explanation of Solution

Note Payable:

Note payable is an obligation of the business to pay to its creditors in future for the benefits received that carries some interest.

Prepare journal entry to record the following transactions of MR Shop are shown below:

Date	Account titles and Explanation	Debit	Credit
April 1	Cash	$4,000
	Notes payable		$4,000
	(To record note issued for bank loan)
April 5	Purchases	$3,000
	Notes payable		$3,000
	(To record note issued for inventory purchase)
April 10	Accounts payable – A.A	$2,000
	Cash		$400
	Notes payable		$1,600
	(To record partial payment made and issued note to settle account)
May 10	Notes payable (old note)	$1,600
	Interest expense (1)	$8
	Cash		$408
	Notes payable (new note)		$1,200
	(To record paid interest and part of partial of principal on old note and issued new note)
May 20	Cash (3)	$4,440
	Discount on bonds payable (2)	$600
	Notes payable		$4,500
	(To record issued note for bank loan)
June 4	Notes payable (old note)	$3,000
	Interest expense (4)	$35
	Cash		$535
	Notes payable (new note)		$2,500
	(To record paid interest and part of partial of principal on old note and issued new note)
June 9	Notes payable	$1,200
	Interest expense (5)	$7
	Cash		$1,207
	(To record paid note with interest at maturity)
June 30	Notes payable	$4,000
	Interest expense (6)	$80
	Cash		$4,080
	(To record paid note with interest at maturity)
July 4	Notes payable	$2,500
	Interest expense (7)	$14.58
	Cash		$2,514.58
	(To record paid note with interest at maturity)
July 19	Notes payable	$4,500
	Interest expense (8)	$60
	Discount on notes payable		$60
	Cash		$4,500
	(To record paid note at maturity)

Table (1)

Working notes:

(1)Calculate interest expenses.

$\begin{array}{c}\text{Interest expense =}\text{Notes payable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$1,600}\times \text{6\%}\times \frac{30}{360}\\ =\$8\end{array}$

(2)Calculate discount on notes payable.

$\begin{array}{c}\text{Discount on notes payable =}\text{Notes payable}\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$4,500}\times 8\text{\%}\times \frac{60}{360}\\ =\$60\end{array}$

(3)Calculate cash proceeds.

$\begin{array}{c}\text{Cash proceeds =}\text{Notes payable }-\text{Discount on notes payable}\\ \text{=}\text{\$4,500}-\$60\\ =\$4,440\end{array}$

(4)Calculate interest expense.

$\begin{array}{c}\text{Interest expense =}\text{Notes payable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$3,000}\times 7\text{\%}\times \frac{60}{360}\\ =\$35\end{array}$

(5)Calculate interest expense.

$\begin{array}{c}\text{Interest expense =}\text{Notes payable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$1,200}\times 7\text{\%}\times \frac{30}{360}\\ =\$7\end{array}$

(6)Calculate interest expense.

$\begin{array}{c}\text{Interest expense =}\text{Notes payable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$4,000}\times 8\text{\%}\times \frac{90}{360}\\ =\$80\end{array}$

(7)Calculate interest expense.

$\begin{array}{c}\text{Interest expense =}\text{Notes payable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$2,500}\times 7\text{\%}\times \frac{30}{360}\\ =\$14.58\end{array}$

(8)Calculate interest expense.

$\begin{array}{c}\text{Interest expense =}\text{Notes payable }\times \text{Interest rate}\times \text{Time period}\\ \text{=}\text{\$4,500}\times 8\text{\%}\times \frac{60}{360}\\ =\$60\end{array}$