Discounting of Notes Payable On October 30, 2019, Sanchez Company acquired a piece of machinery and signed a 12-month note for $24,000. The lace value of the note includes the price of the machinery and interest. The note is to be paid in four $6,000 quarterly installments. The value of the machinery is the present value of the four quarterly payments discounted at an annual interest rate of 16%.
Required:
1. Prepare all the
2. Show how the preceding items would be reported on the December 31, 2019,
1.
Prepare the journal entries and adjusting entry in the books of Company S.
Explanation of Solution
Note payable: Note payable denotes a long-term liability that describes the amount borrowed, signed and issued note. The note carries all the details of payable amounts, interest amounts, and maturity dates.
Prepare the journal entry to record the purchase of machinery:
Date | Account titles and explanation | Debit ($) | Credit($) |
October 30, 2019 | Machinery (1) | $21,779.37 | |
Discount on notes payable (2) | $2,220.63 | ||
Notes Payable | $24,000.00 | ||
(To record the purchase of machinery on note) |
Table (1)
Working note (1):
Determine the present value of machinery or net obligation as on October 30, 2019.
Working note (2):
Determine the total amount of interest expenses or discount on notes payable.
Prepare the adjusting entry to record the interest expense:
Date | Account titles and explanation | Debit ($) | Credit($) |
December 31, 2019 | Interest expense (4) | $580.78 | |
Discount on notes payable | $580.78 | ||
(To record accrued expense) |
Table (2)
Working note (3):
Prepare the schedule of interest expense and obligation reduction:
Date | Payment of instalment | 4% Interest expenses | Reduction of obligation | Net obligation |
October 30, 2019 | $21,779.37 | |||
January 31, 2020 | $6,000.00 | $871.17 | $5,128.83 | $16,650.54 |
April 30, 2020 | $6,000.00 | $666.02 | $5,333.98 | $11,316.56 |
July 31, 2020 | $6,000.00 | $452.66 | $5,547.34 | $5,769.22 |
October 30, 2020 | $6,000.00 | $230.78 | $5,769.22 | $0.00 |
$24,000.00 | $2,220.63 | $21,779.37 |
Table (3)
Working note (4):
Determine the accrued expenses for the month of November and December.
Note: Refer the schedule of interest expenses and obligation reduction for 4% interest expenses payable at first quarter.
Prepare the journal to record the payment of first instalment.
Date | Account titles and explanation | Debit ($) | Credit($) |
January 31, 2020 | Interest expense (5) | $290.39 | |
Notes payable | $6,000.00 | ||
Discount on notes payable | $290.39 | ||
Cash | $6,000.00 | ||
(To record the payment of first instalment) |
Table (4)
Working note (5):
Determine the accrued expenses for the month of January.
Prepare the journal to record the payment of second instalment.
Date | Account titles and explanation | Debit ($) | Credit($) |
April 30, 2020 | Interest expense (Refer Table (3)) | $666.02 | |
Notes payable | $6,000.00 | ||
Discount on notes payable | $666.02 | ||
Cash | $6,000.00 | ||
(To record the payment of second instalment) |
Table (5)
Prepare the journal to record the payment of third instalment.
Date | Account titles and explanation | Debit ($) | Credit($) |
July 31, 2020 | Interest expense (Refer Table (3)) | $452.66 | |
Notes payable | $6,000.00 | ||
Discount on notes payable | $452.66 | ||
Cash | $6,000.00 | ||
(To record the payment of third instalment) |
Table (6)
Prepare the journal to record the payment of fourth instalment.
Date | Account titles and explanation | Debit ($) | Credit($) |
August 30, 2020 | Interest expense (Refer Table (3)) | $230.78 | |
Notes payable | $6,000.00 | ||
Discount on notes payable | $230.78 | ||
Cash | $6,000.00 | ||
(To record the payment of fourth instalment) |
Table (7)
2.
Show the manner in which the preceding items would be reported on the balance sheet as at December 31, 2019.
Explanation of Solution
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (stockholders’ equity) over those resources. The resources of the company are assets which include money contributed by stockholders and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and stockholders’ equity.
The manner in which the preceding items would be reported on the balance sheet is as follows:
Company S | ||
Balance sheet (Partial) | ||
As at December 31, 2019 | ||
Assets | Amount ($) | Amount ($) |
Property, Plant, and Equipment | ||
Machinery | 21,779.37 | |
Liabilities | Amount ($) | Amount ($) |
Current liabilities: | ||
Notes payable | 24,000.00 | |
Less: Discount on notes payable | 1,639.85 | 22,360.15 |
Table (8)
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Chapter 9 Solutions
EBK INTERMEDIATE ACCOUNTING: REPORTING
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