Answer:
a) Prepare journal entries for the transactions noted above.
Sept. 1 Issued a $14,400 note to Pippen to purchase inventory. The 3-month note payable bears interest of 8% and is due December 1. (Flounder uses a perpetual inventory system.)
Dr Inventory 14,400
Cr Notes payable 14,400
Sept. 30 Recorded accrued interest for the Pippen note.
Dr Interest expense 96
Cr Interest payable 96
Oct. 1 Issued a $21,600, 8%, 4-month note to Prime Bank to finance the purchase of a new climbing wall for advanced climbers. The note is due February 1.
Dr Cash 21,600
Cr Notes payable 21,600
Oct. 31 Recorded accrued interest for the Pippen note and the Prime Bank note.
Dr Interest expense 240
Cr Interest payable 240
Nov. 1 Issued a $26,400 note and paid $8,900 cash to purchase a vehicle to transport clients to nearby climbing sites as part of a new series of climbing classes. This note bears interest of 7% and matures in 12 months.
Dr Vehicle 35,300
Cr Notes payable 26,400
Cr Cash 8,900
Nov. 30 Recorded accrued interest for the Pippen note, the Prime Bank note, and the vehicle note.
Dr Interest expense 394
Cr Interest payable 394
Dec. 1 Paid principal and interest on the Pippen note.
Dr Notes payable 14,400
Dr Interest payable 288
Cr Cash 14,688
Dec. 31 Recorded accrued interest for the Prime Bank note and the vehicle note.
Dr Interest expense 298
Cr Interest payable 298
b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense accounts.
notes payable interest payable
debit credit debit credit
14,400 96
21,600 240
26,400 394
14,400 288
48,000 298
740
interest expense
debit credit
96
240
394
298
1,028
c) Show the balance sheet presentation of notes payable and interest payable at December 31
notes payable balance December 31 = $48,000
interest payable balance December 31 = $740
d) How much interest expense relating to notes payable did Flounder incur during the year?
$1,028
