Question

Tyrell Co. entered into the following transactions involving short-term liabilities. Year 1 Apr. 20 Purchased $38,000 of merchandise on credit from Locust, terms n/30. May 19 Replaced the April 20 account payable to Locust with a 90-day, 8%, $35,000 note payable along with paying $3,000 in cash. July 8 Borrowed $60,000 cash from NBR Bank by signing a 120-day, 11%, $60,000 note payable. __

Answer 1

Solution:

1) Maturity date        

                                             locust NBR fargo    

date of the note             19-May 8-Jul 28-Nov    

term of note                         90           120 60    

maturity date                     17-Aug   5-Nov 27-Jan    

2) interest due at maturity      

principal * Rate * time = interest  

locust 35,000 * 8% * 90/360 = 700  

NBR 63,000 * 11% * 120/360 = 2310  

Fargo 33,000 * 7% * 60/360 = 385  

3) Amount in adjusting entry      

33,000*7%*33/360        

= 211.75        

                                 principal * Rate * time = interest

interest to be acccrued 33,000 * 7% * 33/360 = 211.75

4) interest expense to be recorded in 2017      

198        

                                    principal * Rate * time = interest

interest to recorded in 2018 33,000 * 7% * 27/360 = 173.25

Journal entries        

Date Accounting titles & Explanations Debit Credit  

2016        

20-Apr          inventory    38,000    

                         Accounts payable    38,000  

19-May    Accounts payable   38,000    

                                cash               3,000  

                     notes payable    35,000  

8-Jul                 Cash    63,000    

                         notes payable              63,000  

17-Aug         notes payable   35,000    

                           interest expense               700    

                         cash     35,700  

5-Nov          notes payable   63,000    

                       interest expense                            2,310    

                       cash                                    65,310  

28-Nov            Cash    33,000    

                             notes payable              33,000  

31-Dec    interest expense   211.75    

                       interest payable            211.75  

2017        

27-Jan notes payable   33,000    

                  interest payable   211.75    

               interest expense   173.25    

                       cash                       33,385