Chapter 9, Problem 1PSB

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.

Solution:

Given,

F note issued on April 22, 2016 amounting $5,000 for 30 days.

S note issued on July 15, 2016 amounting to $12,000 for 120 days at 9%.

C note issued on December 6, 2016 amounting to $8,000 for 45 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	F	May 23, 2016	60 days	July 23,2016
2	S	July 15, 2016	120 days	November 15, 2016
3	C	December 6, 2016	45 days	January 20, 2017

Table (1)

Thus, maturity date for note F is July 23,2016S is November 15, 2016 and C is January 20, 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 F

Substitute $4,600 for principal, .15 for interest rate and 90 days for term of note.

  $\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$4,600\times .15\times \left[\frac{90}{360}\right]\\ =\$115\end{array}$

For S

Substitute $12,000 for principal, .10 for interest rate and 120 days for term of note.

$\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$12,000\times .10\times \left[\frac{120}{360}\right]\\ =\$400\end{array}$

For C

Substitute $8,000 for principal, .09 for interest rate and 45 days for term of note.

  $\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$8,000\times .09\times \left[\frac{45}{360}\right]\\ =\$90\end{array}$

Thus, interest due at maturity of F is $115, S is $400 and C is $90.

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 C

Substitute $8,000 for principal, 0.09 for interest rate and 25 days for number of days in 2016.

  $\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$8,000\times 0.09\times \left[\frac{25}{360}\right]\\ =\$50\end{array}$

Thus , $50 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 C in 2016,

  $\begin{array}{c}\text{Number}\text{of}\text{days}\text{of}\text{Note}\text{C}\text{in}2016=\text{December}6,2016\text{to}\text{December}31,2016\\ =\text{25}\text{days}\end{array}$

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 C

Substitute $8,000 for principal, 0.09 for interest rate and 20 days for number of days in 2016.

  $\begin{array}{c}\text{Interest}\text{due}\text{at}\text{maturity}=\$8,000\times 0.09\times \left[\frac{20}{360}\right]\\ =\$40\end{array}$

Thus, $40 is the interest expense to be recorded in 2017

Working note:

Calculation of number of days of Note C in 2017,

  $\begin{array}{c}\text{Number}\text{of}\text{days}\text{of}\text{Note}\text{C}\text{in}2017=\text{January}1,2017\text{to}\text{January}20,2017\\ =\text{20}\text{days}\end{array}$

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 22,2016	Inventory		5,000
	Account Payable -L			5,000
	(To record purchase of inventory)

Table (2)

• 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 23,2016	Account Payable - L		5,000
	Notes Payable			4600
	Cash			400
	(To record issuance of notes against loan of L)

Table (3)

• 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 15,2016	Cash		12,000
	Notes Payable - S			12,000
	(To record notes payable from N Bank)

Table (4)

• 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($)	Credit($)
July 23,2016	Notes Payable		4,600
	Interest expenses		115
	Cash			4,715
	(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 these 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 12,2016	Notes Payable		12,000
	Interest expenses		400
	Cash			12,400
	(To record notes paid with interest)

Table (6)

• Notes payable is a liability account. Since it is decreasing, this account is debited.
• Interest expenses are an expense account. Since company is paying these 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($)	Credit($)
December 6,2016	Cash		8,000
	Notes Payable			8,000
	(To record notes payable )

Table (7)

• 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		50
	Interest Payable			50
	(To record notes payable )

Table (8)

• 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 20,2017	Notes Payable		8,000
	Interest Payable		50
	Interest expenses		40
	Cash			8,090
	(To record notes paid with interest)

Table (9)

• 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 these expenses, it is debited.
• Cash is an asset account. Since company has paid cash, balance of cash has decreased. Hence it is credited.