Notes Payable:
Notes payable is a promissory note that is issued by the borrower to obtain a specific amount of money which the borrower promises to pay within a year on a specific date. It’s a kind of current liability.
Journal entries are the accounting transaction used to identify which accounts has been debited and credited in the journal. In the journal entries for every debit there must be a correspondence credit.
Rules of Journal Entries:
- To increases balance of account: Assets Debit, Liabilities Credit, Expenses Debit, Revenue Credit, Capital Credit
- To decreases balance of account: Assets Credit, Liabilities Debit, Expenses Credit, Revenue Debit, Capital Debit
1.
To identify: The best option.
Explanation of Solution
Option A: To borrow $6,000 as on June 1 for 90 days bearing the interest at10%.
Calculation of interest expenses of option A.
Given,
Principal is $6,000.
Rate of interest is 10%.
Time is 90 days.
Formula to calculate interest expense,
Substitute $6,000 for principal, 10% for rate o interest and 90 days for time.
The interest expenses for the option A is $150.
Option B: To borrow $6,000 as on June 1 for 120days bearing the interest at 8%.
Calculation of interest expenses for option B.
Given,
Principal is $6,000.
Rate of interest is 8%.
Time is 120 days.
Formula to calculate interest expense,
Substitute $6,000 for principal, 8% for rate of interest and 120 days for time.
The interest expenses for the option B is $160.
Since, the interest rate for option A is higher than the option B, but the interest expense for option B is higher than option A because in option A the time for borrow the loan is 90 days whereas for option B is it 120days.
So if the company prefer interest cost so option A is preferable but if the company prefer addition time to used to loan the option B should be prefer the company only has to pay $10 more for the additional 30days to used the loan for option B.
The total number of days in a year is to be rounded to 360.
2.
To prepare: Journal entries.
2.
Explanation of Solution
a.
Option A-at the date of issuance
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
June 1 | Cash | 6,000 | ||
Notes payable | 6,000 | |||
(Being the notes payable issued) |
Table (1)
- Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
- Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.
b.
Option B-at the date of issuance
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
June 1 | Cash | 6,000 | ||
Notes payable | 6,000 | |||
(Being the notes payable issued) |
Table (2)
- Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
- Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.
c.
Option A-at maturity date
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
August 31 | Notes payable | 6,000 | ||
Interest payable | 150 | |||
Cash | 6150 | |||
( Being the notes payable ha s been matured and amount of interest has been due ) |
Table (3)
- Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
- Interest payable is an expense and it is increases by $150 therefore it is debited by $160.
- Cash is an assets and cash is decrease by $6,150 so cash is credited by $6,150.
d.
Option B-at maturity date
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Sept 30 | Notes payable | 6,000 | ||
Interest payable | 160 | |||
Cash | 6160 | |||
( Being the notes payable ha s been matured and amount of interest has been due ) |
Table (4)
- Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
- Interest payable is an expense and it is increases by $160 therefore it is debited by $160.
- Cash is an assets and cash is decrease by $6,160 so cash is credited by $6,160.
3.
To explain:-the journal entries prepare in part 2
a.
Option A-at the date of issuance
- Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
- Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.
b.
Option B-at the date of issuance
- Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
- Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.
c.
Option A-at maturity date
- Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
- Interest payable is an expense and it is increases by $150 therefore it is debited by $160.
- Cash is an assets and cash is decrease by $6,150 so cash is credited by $6,150.
d.
Option B-at maturity date
- Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
- Interest payable is an expense and it is increases by $160 therefore it is debited by $160.
- Cash is an assets and cash is decrease by $6,160 so cash is credited by $6,160.
4.
To prepare:-Journal entries assuming that the funds are borrowed on 1st December.
3.
Explanation of Solution
a.
Option A-the year end adjustment
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Dec 31 | Interest expense | 50 | ||
Interest payable | 50 | |||
(Being the amount of interest become due) |
Table (5)
- Interest is an expense which increases and has due on December 31 so it is debited by $50.
- Interest payable is a liability and it is increases by $50 so it is credited by $50.
Working notes:
Calculation of amount of interest expenses on December 31
Formula to calculate the amount of interest expenses,
Substitute $6,000 for principal amount 10% for rate of interest and 30 days for time.
b.
Option B- the year end adjustment
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Dec 31 | Interest expense | 40 | ||
Interest payable | 40 | |||
(Being the amount of interest become due) |
Table (6)
- Interest is an expense which increases and has due on 31stDecember so it is debited by $40.
- Interest payable is a liability and it is increases by $40 so it is credited by $50.
Working notes:
Calculation of amount of interest expenses on December 31
Formula to calculate the amount of interest expenses,
Substitute $6,000 for principal amount 8% for rate of interest and 30 days for time.
c.
Option A-at maturity date
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Feb 28 | Interest expenses | 100 | ||
Interest payable | 50 | |||
Notes payable | 6,000 | |||
Cash | 6,150 | |||
(Being the notes payable has been mature) |
Table (7)
- Interest is an expense and it is increases by $100 therefore it is debited
- Interest payable is a liability and it is decrease by $50 therefore it is credited
- Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
- Cash is an asset and it is decreases therefore it is debited by $6,150
Working notes:
Calculation of amount of interest expenses on February 28
Formula to calculate the amount of interest expenses,
Substitute $6,000 for principal amount 10% for rate of interest and 60 days for time.
d.
Option B-at the maturity date
Date | Account title and explanation | Post ref | Debit($) | Credit($) |
Feb 28 | Interest expenses | 120 | ||
Interest payable | 40 | |||
Notes payable | 6,000 | |||
Cash | 6,160 | |||
(Being the notes payable has been mature) |
Table (8)
- Interest is an expense and it is increases by $120therefore it is debited
- Interest payable is a liability and it is decrease by $40 therefore it is credited
- Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
- Cash is an asset and it is decreases therefore it is debited by $6,160
Working note:
Calculation of amount of interest payable on February 28
Formula to calculate the amount of interest expenses,
Substitute $6,000 for principal amount 8% for rate of interest and 90 days for time.
5.
To explain: The journal entries prepare in part 4.
a.
Option A-the year end adjustment
- Interest is an expense which increases and has due on 31stDecember so it is debited by $50.
- Interest payable is a liability and it is increases by $50 so it is credited by $50.
b.
Option B- the year end adjustment
- Interest is an expense which increases and has due on 31stDecember so it is debited by $40.
- Interest payable is a liability and it is increases by $40 so it is credited by $50.
c.
Option A-at maturity date
- Interest is an expense and it is increases by $100 therefore it is debited
- Interest payable is a liability and it is decrease by $50 therefore it is credited
- Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
- Cash is an asset and it is decreases therefore it is debited by $6,150
d.
Option B-at the maturity date
- Interest is an expense and it is increases by $120therefore it is debited
- Interest payable is a liability and it is decrease by $40 therefore it is credited
- Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
- Cash is an asset and it is decreases therefore it is debited by $6,160.
Want to see more full solutions like this?
Chapter 9 Solutions
FINANCIAL ACCT.FUND.(LOOSELEAF)
- What is the purpose of a closing memo or closing checklist for a registry office closing? The buyer’s deposit is usually made payable to the real estate broker in trust. When the transaction closes, the broker can take the deposit from the trust account and apply it to the real estate commission.What if the deposit is not enough to cover the commission?arrow_forwardAs the new staff person in your company’s treasury department, you have been asked to conduct research related to a proposed transfer of receivables. Your supervisor wants the authoritative sources for the following items that are discussed in the receivables transfer agreement. Instructions Access the IFRS authoritative literature at the IASB website. (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to prepare responses to the following items. (a) Identify relevant IFRSs that address transfers (derecognition) of receivables. (b) What are the criteria for a transfer of a financial asset to qualify for derecognition? (c) Provide the definition for “Amortized cost.”arrow_forwardProvide an example of each of the following; Conspicuous consumption Information you will need to fill out an application to rent an apartment A government agency you can contact to file a fraud complaint A way to prevent fraud on your credit card A way to protect yourself from identity theftarrow_forward
- the accounts payable (A/P) clerk asked you to open an account named New Expenses. You know that an account name should be specific and well defined, and you're afraid the A/P clerk might charge some expenses to the account that are inappropriate. Why do you think the A/P clerk needs the New Expenses account? Who needs to know this information and what action should you consider?arrow_forwardA trust account journal does not need to include which of the following information? A social security or tax ID number of the beneficiary A running balance after each receipt or disbursement The date name of the payee check number reference to vendor document and amount for each disbursement The date name of the payor name of the principal and amount for each receipt PLEASE EXPLAIN WHY THE OPTION IS CORRECT AND REMAINING INCORRECT NEED ANSWER IN DETAILarrow_forwardAre there any regulations or procedures in place for source documentation and receipts for payments or purchases made by the nonprofit organization? Is it any difference whether you pay with petty cash, a cheque, or a credit card?arrow_forward
- An employee opens customer payments, records them, and delivers the deposit to the bank is pressure, opportunity or rationalization? An employee earns minimum wage and has a many student loans to payoff is pressure, opportunity or rationalization?arrow_forwardHow do you find and calculate FICA-Med on a payroll register?arrow_forwardA client comes to you who needs help developing a plan for retirement and doesn’t have a current budget and hasn’t tracked expenses before. What would you tell your client he should do in order to get ready for your next meeting and how these action items are relevant to retirement planning?arrow_forward
- How would a client re-contribute a coronavirus-related payout to their individual retirement account (IRA)?arrow_forwardWhat is Social Security and what are some of the benefits/advantages? There are different types of beneficiaries. Name as many as you can. What age can you begin drawing for old age Benefits? What are some of the reasons that you may want to WAIT to begin drawing Social Security?arrow_forwardHow will the following items affect the pass book balance? Direct payment by customer into the back account. Interest on investment collected by the bank.arrow_forward
- Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,Business Its Legal Ethical & Global EnvironmentAccountingISBN:9781305224414Author:JENNINGSPublisher:Cengage