Chapter 11, Problem 1BP

1.

To determine

Identify the maturity date for each of the three notes described.

Explanation of Solution

Notes payable:

Notes Payable is a written promise to pay a certain amount on a future date, with certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs.

Maturity date:

The date on which the borrower should pay the principal amount of loan, or bond, is referred to as maturity date.

Particulars	Company F	Bank S	Bank C
Date of  note	23rd   May	15th July	6th December
Terms of the note ( in days)	60	120	45
Maturity date	22nd  July	12th November	20th   January

(Table 1)

2.

To determine

Identify the interest due at maturity for each of the three notes.

Explanation of Solution

Calculate the interest due at maturity for the note bearing an amount of $4,600.

$\begin{array}{c}\begin{array}{c}\text{Interest due at maturity for }\\ \text{the note bearing \$4,600 }\end{array}\}\text{= }\left(\begin{array}{l}\text{Principal amount}\times \text{ Annual interest rate }\\ \times \text{ Time period}\end{array}\right)\\ =\$4,600\times 15\%\times \frac{60}{360}\\ =\$115\end{array}$

Therefore, the interest due at maturity for the note bearing an amount of $4,600 is $115.

Calculate the interest due at maturity for the note bearing an amount of $12,000.

$\begin{array}{c}\begin{array}{c}\text{Interest due at maturity for }\\ \text{the note bearing \$12,000 }\end{array}\}\text{= }\left(\begin{array}{l}\text{Principal amount}\times \text{ Annual interest rate }\\ \times \text{ Time period}\end{array}\right)\\ =\$12,000\times 10\%\times \frac{120}{360}\\ =\$400\end{array}$

Therefore, the interest due at maturity for the note bearing an amount of $12,000 is $400.

Calculate the interest due at maturity for the note bearing an amount of $8,000.

$\begin{array}{c}\begin{array}{c}\text{Interest due at maturity for }\\ \text{the note bearing \$8,000 }\end{array}\}\text{= }\left(\begin{array}{l}\text{Principal amount}\times \text{ Annual interest rate }\\ \times \text{ Time period}\end{array}\right)\\ =\$8,000\times 9\%\times \frac{45}{360}\\ =\$90\end{array}$

Therefore, the interest due at maturity for the note bearing an amount of $8,000 is $90.

3.

To determine

Identify the interest expense to be recorded in the adjusting entry at the end of Year 1.

Explanation of Solution

$\begin{array}{c}\begin{array}{l}\text{Accrued interest on Bank C }\\ \text{note at the end of Year 1}\end{array}\}=\left(\text{Total interest on note × Time period for the term Year 1}\right)\\ =\$90\times \frac{25}{45}\\ =\$50\end{array}$

Therefore, the interest expense recorded in the adjusting entry at the end of Year 1 is $50.

4.

To determine

Identify the interest expense to be recorded in Year 2.

Explanation of Solution

$\begin{array}{c}\begin{array}{l}\text{Interest on Bank C }\\ \text{note in Year 2}\end{array}\}=\left(\text{Total interest on note × Time period for the term Year 2}\right)\\ =\$90\times \frac{20}{45}\\ =\$40\end{array}$

Therefore, the interest expense recorded in Year 2 is $40.

To determine

Prepare journal entry to record the given transaction and events.

Explanation of Solution

Date	Account title and Explanation	Debit in $	Credit in $
April 22, Year 1	Merchandise  inventory	5,000
	Accounts payable to Company F		5,000
	(To record the purchase of merchandise on credit)
May 23	Accounts payable to  Company F	5,000
	Cash		400
	Notes payable-Company F		4,600
	(Paid $400 cash and gave a 60-day,  15% note to extend due date on account)
July 15	Cash	12,000
	Notes payable –Bank S		12,000
	(Borrowed cash with a 120-day, 10% note.)
July 22	Interest expense	115
	Notes payable –Company F	4,600
	Cash		4,715
	(Paid note with interest.)
November 12	Interest expense	400
	Notes payable –Bank S	12,000
	Cash		12,400
	(Paid note with interest.)
December 6	Cash	8,000
	Notes payable –Bank C		8,000
	(Borrowed cash with 45-day, 9% note.)
December 31	Interest expense	50
	Interest payable		50
	(Accrued interest on note payable.)
January 20, Year 2	Interest expense	40
	Notes payable- Bank C	8,000
	Interest payable	50
	Cash		8,090
	(Paid note with interest.)

(Table 2)