Chapter 9, Problem 1PSA

To determine

Short term notes payable:

Short term notes payable are the short term financing instruments used in business. It’s a short term liability for business.

Given,

L note issued on April 20, 2016 amounting $40,250 for 30 days.

N note issued on July 8, 2016 amounting to $80,000 for 120 days at 9%.

F note issued on November 28, 2016 amounting to $42,000 for 60 day at 8%.

1.

To calculate: The date of maturity of notes

Explanation of Solution

Date of maturity of notes

S. No.	Notes	Issue date	Term	Maturity Date
1	L	May 19, 2016	90 days	August 19,2016
2	N	July 8, 2016	120 days	November 8, 2016
3	F	November 28, 2016	60 days	January 28, 2017

Table (1)

Thus, Maturity date for note L is August 19, 2016 N is November 8, 2016 and F is January 28, 2017

2.

To determine

To calculate: Interest due at maturity

Explanation of Solution

Formula to calculate interest due at maturity,

  $\text{Interest}\text{due}\text{at}\text{maturity}=\text{Principal}\times \text{Interest}\text{rate}\times \left[\frac{\text{Term}\text{of}\text{note}}{360\text{days}}\right]$

For L

Substitute $35,000 for principal, .10 for interest rate and 90 days for term of note.

  $\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$35,000\times .10\times \left[\frac{90}{360}\right]\\ =\$875\end{array}$

For N

Substitute $80,000 for principal, .09 for interest rate and 120 days for term of note.

$\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$80,000\times .09\times \left[\frac{120}{360}\right]\\ =\$2,400\end{array}$

For F

Substitute $42,000 for principal, .08 for interest rate and 60 days for term of note.

  $\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$42,000\times .08\times \left[\frac{60}{360}\right]\\ =\$560\end{array}$

Thus, interest due at maturity of L is $875, N is $2,400 and F is $560.

3.

To determine

To calculate: Interest expense to be recorded in the adjusting entry at the end of 2016.

Explanation of Solution

Formula to calculate interest expense (to be recorded in the adjusting entry at the end of 2016),

  $\text{Interest}\text{due}\text{at}\text{maturity}=\text{Principal}\times \text{Interest}\text{rate}\times \left[\frac{\text{Number}\text{of}\text{days}\text{in}\text{2016}}{360\text{days}}\right]$

For F

Substitute $42,000 for principal, .08 for interest rate and 33 days for number of days in 2016.

  $\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$42,000\times .08\times \left[\frac{33}{360}\right]\\ =\$308\end{array}$

Thus , $308 is the interest expense to be recorded in the adjusting entry at the end of 2016

Working note:

Calculation of number of days of Note F in 2016,

  $\begin{array}{c}\text{Number}\text{of}\text{days}\text{of}\text{Note}\text{F}\text{in}2016=\text{November}28,2016\text{to}\text{December}31,2016\\ =2\text{days}+31\text{days}\\ =\text{33}\text{days}\end{array}$

4.

To determine

To calculate: Interest expense to be recorded in 2017.

Explanation of Solution

Formula to calculate interest expense (to be recorded in 2017),

  $\text{Interest}\text{due}\text{at}\text{maturity}=\text{Principal}\times \text{Interest}\text{rate}\times \left[\frac{\text{Number}\text{of}\text{days}\text{in}\text{2017}}{360\text{days}}\right]$

For F

Substitute $42,000 for principal, 0.08 for interest rate and 27 days for number of days in 2016.

  $\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$42,000\times .08\times \left[\frac{27}{360}\right]\\ =\$252\end{array}$

Working note:

Calculation of number of days of Note F in 2017,

  $\begin{array}{c}\text{Number}\text{of}\text{days}\text{of}\text{Note}\text{F}\text{in}2017=\text{January}1,2017\text{to}\text{January}28,2017\\ =\text{27}\text{days}\end{array}$

5.

To determine

To prepare: Journal entry for all transactions

Explanation of Solution

Journal entry for all transactions

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
April 20,2016	Inventory		40,250
	Account Payable - L			40,250
	(To record purchase of inventory)

Table (1)

• Inventory is an asset account. Since company has received inventory, balance of inventory has increased. Hence it is debited.
• Account Payable is a liability account. Since it is increasing, this account is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
May 19,2016	Account Payable - L		40,250
	Notes Payable			35,000
	Cash			5,250
	(To record issuance of notes against loan of L)

Table (2)

• Account Payable - L is a liability account. Since it is decreasing, this account is debited.
• Notes Payable is a liability account. Company is issuing note, so balance of note is increasing, hence credit this account.
• Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
July 8,2016	Cash		80,000
	Notes Payable - N			80,000
	(To record notes payable from N Bank)

Table (3)

• Cash is an asset account. Since company has received cash, balance of cash has increased. Hence it is debited.
• Note Payable is a liability account. Since it is increasing, this account is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
August 19,2016	Notes Payable		35,000
	Interest expenses		875
	Cash			35,875
	(To record notes paid with interest)

Table (4)

• Notes payable is a liability account. Since it is decreasing, this account is debited.
• Interest expenses is an expense account. Since company is paying this expenses, it is debited.
• Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
November 8,2016	Notes Payable		80,000
	Interest expenses		2,400
	Cash			82,400
	(To record notes paid with interest)

Table (5)

• Notes payable is a liability account. Since it is decreasing, this account is debited.
• Interest expenses are an expense account. Since company is paying this expense, it is debited.
• Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
November 28,2016	Cash		42,000
	Notes Payable - F			42,000
	(To record notes payable from F Bank)

Table (6)

• Cash is an asset account. Since company has received cash, balance of cash has increased. Hence it is debited.
• Note Payable is a liability account. Since it is increasing, this account is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
December 31,2016	Interest expenses		308
	Interest Payable			308
	(To record notes payable from F Bank)

Table (7)

• Interest expense is an expense account. Since its balance is increasing, it is to be debited.
• Interest payable is a liability account. Since it is increasing, this account is credited.

Date	Account Title and Explanation	Post ref	Debit($)	Credit($)
January 28,2017	Notes payable		42,000
	Interest payable		308
	Interest expenses		252
	Cash			42,560
	(To record notes paid with interest)

Table (8)

• Notes payable is a liability account. Since it is decreasing, this account is debited.
• Interest Payable is a liability account. Since company is paying this liability, it is debited.
• Interest expenses are an expense account. Since company is paying this expense, it is debited.
• Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.