Chapter 9, Problem 1PSB

Warner Co. entered into the following transaction involving short-term liabilities in 2017 and 2018.

2017

Apr. 22Purchased $5,000 of merchandise on credit from Fox-Pro, terms n/30. Warner uses the perpetual inventory system.
May 23 Replaced the April 22 account payable to Fox-Pro with a 90-day, $4,600 note bearing 15% annual interest along with paying $400 in cash.
July 15 Borrowed $12,000 cash from Spring Bank by signing a 120-day, 10% interest-bearing note with a face value of $12,000.
Paid the amount due on the note to Fox-Pro at maturity.
Paid the amount due on the note to Spring Bank maturity.
Dec. 6 Borrowed $8,000 cash from City Bank by signing a 45-day, 9% interest-bearing note with a face value of $8,000.
31 Recorded an adjusting entry for accrued interest on the note to City Bank.

2018

Paid the amount due on the note to City Bank at maturity.

Required

1. Determine the maturity date for each of the three notes described.
2. Determine the interest due at maturity for each of the three notes. (Assume a 360-day year.)
3. Determine the interest expense to be recorded in the adjusting entry at the end of 2017.
4. Determine the interest expense to be recorded in 2018.
5. Prepare journal entries for all the preceding transactions and events for years 2017 and 2018.

Summary Introduction

Introduction: The note refers to a promissory note. It is assurance made by one person to another to pay an amount of borrowed money in the future on a specific date.

To identify: Maturity date for each of three notes.

Explanation of Solution

Particular	Maturity date
Note to F	22 July 2017
Note to S bank	15 November 2017
Note to C bank	20 January 2018

Summary Introduction

Introduction: Interest is the non-operating expense that is to be paid on borrowings. Interest is calculated as a fixed percentage on the borrowed amount.

To calculate: Interest due at maturity date for each of three notes.

Explanation of Solution

  $$

  $\begin{array}{c}\text{Interest}\text{due}\left(\text{for}\text{F}\right)=\text{principal}\times \text{interest}\text{}\text{}\text{rate}\times \left(\frac{\text{days}}{360}\right)\\ =\$4,600\times 15\%\times \left(\frac{60}{360}\right)\\ =\$115\end{array}$

  $\begin{array}{c}\text{Interest}\text{due}\left(\text{for}\text{S}\text{}\text{bank}\right)=\text{principal}\times \text{interest}\text{}\text{}\text{rate}\times \left(\frac{\text{days}}{360}\right)\\ =\$12,000\times 10\%\times \left(\frac{120}{360}\right)\\ =\$400\end{array}$

  $\begin{array}{c}\text{Interest}\text{due}\left(\text{for}\text{C}\text{}\text{bank}\right)=\text{principal}\times \text{interest}\text{}\text{}\text{rate}\times \left(\frac{\text{days}}{360}\right)\\ =\$8,000\times 9\%\times \left(\frac{45}{360}\right)\\ =\$90\end{array}$

Summary Introduction

Introduction: Interest expenses are the non-operating expenses. It is the cost paid on borrowed fund.

To calculate: Interest expense for adjusting entries for 2017.

Explanation of Solution

  $$

  $\begin{array}{c}\text{Interest}\text{expense}=\text{principal}\times \text{interest}\text{}\text{}\text{rate}\times \left(\frac{\text{days}}{360}\right)\\ =\$8,000\times 9\%\times \left(\frac{25}{360}\right)\\ =\$50\end{array}$

Summary Introduction

Introduction: Interest expenses are the non-operating expenses. It is the cost paid on borrowed fund.

To calculate: Interest expense for adjusting entries for 2018.

Explanation of Solution

  $$

  $\begin{array}{c}\text{Interest}\text{expense}=\text{principal}\times \text{interest}\text{}\text{}\text{rate}\times \left(\frac{\text{days}}{360}\right)\\ =\$8,000\times 9\%\times \left(\frac{20}{360}\right)\\ =\$40\end{array}$

Summary Introduction

Introduction: Journal entries refer to initial entries made for any business transaction. Journal entries are done with the help of using source document. Journal entries have effect on both side i.e. debit and credit.

To prepare: Journal entries for of all transactions for year 2017 and 2018.

Explanation of Solution

Date	Account	Debit ($)	Credit($)
2017 April 22	Inventory a/c Company F a/c	5,000	5,000
	(To record inventory purchased on credit )

• Inventory is an asset and it is increased by $5,000 therefore it is debited.
• Company Fis a creditor and it is increased by $5,000 therefore it is credited.

Date	Account	Debit ($)	Credit($)
2017 May 23	Company F a/c Cash a/c Notes payable a/c	5000	400 4,600
	(To record cash payment to company F and notes issued )

• Company F is a creditor and it is replaced with notes payable therefore it is debited.
• Cash paid to company F reduces the cash balance therefore it is credited.
• Notes payable increases the liability therefore it is credited.

Date	Account	Debit ($)	Credit($)
2017 July 15	Cash a/c Notes payable (bank S) a/c	12,000	12000
	(To record notes payable to S bank )

• Cash is borrowed by issuing notes payable due to which cash increases therefore cash account is debited.
• Notes payable is issued to bank Swhich increases the liability therefore it is credited.

Date	Account	Debit ($)	Credit($)
2017 July 23	Notes payable(company F) a/c Interest expense a/c Cash a/c	4,600 115	4,715
	(To record interest and notes amount paid to company F )

• Notes payable is a liability which are paid therefore it is debited.
• Payment of notes payable reduces cash balance therefore it is credited.
• Interest expenses is an expense and are paid therefore it is debited.

Date	Account	Debit ($)	Credit($)
2017 Nov 15	Notes payable(bank S)a/c Interest expense a/c Cash a/c	12,000 400	12,400
	(To record interest and notes amount paid to bank S )

• Notes payable(bank S) is a liability and it is paid therefore it is debited.
• Interest expense is an expense and it is increasing therefore it is debited.
• Cash account balance is reduced due to payment of liability therefore it is credited.

Date	Account	Debit ($)	Credit($)
2017 Dec 06	Cash a/c Notes payable(bank C) a/c	8,000	8000
	(To record notes payable from bank C )
Date	Account	Debit ($)	Credit($)
2017 Dec 31	Interest expense a/c Interest payable a/c	50	50
	(To record accrued interest )

• Cash account balance increases because of issuing of notes payable therefore it is debited.
• Notes payable (bank C) increases the liability therefore it is credited.
• Interest expense is debited because it is an expense and it is increasing.
• Interest payable is credited because it is a liability and it is increasing.

Date	Account	Debit ($)	Credit($)
2018 Jan 21	Notes payable (bank C) a/c Interest payable a/c Interest expense a/c Cash a/c	8,000 50 40	8,090
	(To record amount paid to bank C for notes on maturity date)

• Notes payable (bank C) reduces the liability as it is paid therefore it is debited.
• Interest payable paid reduces the liability therefore it is debited.
• Interest expense is an expense and it is increasing therefore it is debited.
• Cash account balance is credited because payment of liability and expense reduces cash balance.