Concept explainers
(1)
Notes Payable
Notes payable is a legal agreement prepared between issuer and payee. It is agreement between issuer and payee towards payment of total amount (principal and interest) based on certain interest and conditions. Here, particular value of interest is paid on the face value of note payable and thus, referred to interest payable.
To prepare: Journal entries for these transactions.
(1)
Explanation of Solution
On September 5, 2016 (transaction a), the loan is not made from the line of credit. Hence, no entry is made.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | ||||
Transaction b | Cash | 12,000,000 | ||||||
October | 2018 | |||||||
Notes Payable | 12,000,000 | |||||||
(To record the borrowed of cash on 10% notes payable) |
When cash is borrowed on 10% notes payable, cash and notes payable increases. Cash is an asset and thus, Cash account increases with $12,000,000. Notes payable is a liability and thus, credit Notes payable account with $12,000,000.
Journal entry to record collection of refundable deposit
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | ||||
Transaction c |
Cash |
2,600 | ||||||
December | 2018 | |||||||
Liability - Refundable Deposits | 2,600 | |||||||
(To record the collection of refundable deposits) |
When collection of refundable deposits is recorded, cash and liability – refundable deposits are the accounts affected. Cash is an asset and thus, Cash account increases with $2600 due to collection of refundable deposits. Notes payable is a liability and is increased. Thus, credit Notes payable account with $2,600.
Journal entry to record the sales for 2018
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | ||||
Transaction d | ||||||||
December | 2018 |
|
4,346,000 | |||||
Sales Revenue | 4,100,000 | |||||||
Sales Taxes Payable | 246,000 | |||||||
(To record the sales for 2018) |
When sales for 2018 are recorded, the following three accounts are affected: Accounts receivables, sales revenue, and sales tax payable. Accounts receivables increases the asset due to sales made on credit. Sales revenue increases the equity due to receipt of revenue due to sales made. Sales tax payable increases the liability account since, tax amount is due. Thus, asset (account receivable), equity (sales revenue), and liability (sales tax payable) increases. Hence, debit accounts receivable account with 4,346,000; credit Sales Revenue and Sales Taxes Payable with $4,100,000 and $246,000.
Working note to determine the amount of sales tax due is as follows:
Journal entry to record the interest expense for 3 months.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | ||||
Transaction e | ||||||||
December | 2018 | Interest Expense | 300,000 | |||||
Interest Payable | 300,000 | |||||||
(To record the interest expense for 3 months) |
When interest expense is recorded for 3 months, interest expense and interest payable accounts are affected. Interest expense affects the equity account and interest payable affects the liability account. Interest expense is an expense and reduces the equity. Thus, debit interest expense with $300,000. Interest Payable is a liability and is increased. Thus, credit interest payable with $300,000. Working note for determining interest expense is as below:
Journal entry to record the issue of
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | ||||
Transaction f | ||||||||
February | 2019 | Cash | 10,000,000 | |||||
Bonds Payable | 10,000,000 | |||||||
(To record the issue of bonds at face value) |
When bonds are issued at face value, cash and bonds payable account are affected. Cash is an asset and increased due to issuance of bonds. Bonds payable is a liability and is increased due to issuance. Hence, debit cash account and credit bonds payable account with $10,000,000.
Journal entry to record the payment of loan and interest.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | ||||
Transaction f | Notes Payable (L–) | 12,000,000 | ||||||
March | 2019 | |||||||
Interest Expense (E–) | 200,000 | |||||||
Interest Payable (L–) | 300,000 | |||||||
Cash (A–) | 12,500,000 | |||||||
(To record the payment of loan and interest) |
Payment of loan involves the following accounts: Notes payable, Interest expense, interest payable account, and cash. Notes payable and interest payable are liability and is decreased due to payment of loan and interest. Interest expense is an expense and decreases the equity account. Cash is an asset and decreased due to payment of loan and interest. Thus, debit notes payable, interest expense, and interest payable with $12,000,000, $200,000, and $300,000; credit Cash with $12,500,000.
Working note to calculate interest expense for 2 months (December 31, 2018 to March 1, 2019) on 10% note is as follows:
Working note for determining interest payable is as follows:
Working note to determine the amount of cash is as follows:
Journal entry to record the return of refundable deposits.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | ||||
Transaction g | ||||||||
March | 2017 | Liability - Refundable Deposits (L+) | 1,300 | |||||
Cash (A–) | 1,300 | |||||||
(To record the return of refundable deposits) |
Return of refundable deposits involves Liability - Refundable Deposits and Cash account. Liability – Refundable deposits is a liability and increased due to returns made. Cash is decreased to refunds made. Thus, debit Liability - Refundable Deposits account and credit Cash account with $1,300.
Working notes to determine the amount of return of refundable deposits:
(2)
To prepare: Current and long-term liability sections of the December 31, 2016, balance sheet.
(2)
Explanation of Solution
Balance sheet (Partial) December 31, 2016 | |
Current liabilities: | |
Accounts payable | $252,000 |
Current portion of bank loan | $2,000,000 |
Liability – Refundable deposits | $2,600 |
Sales taxes payable | $246,000 |
Accrued interest payable | $300,000 |
Total current liabilities | $2,800,600 |
Long-term liabilities: | |
Bank loan to be refinanced on a long-term basis | $10,000,000 |
The total amount of loan is $12,000,000. The company is intended to refinance the total amount of bank loan. But, actually refinancing is done only for $10,000,000. Hence, current portion of loan is $2,000,000 ($12,000,000 – $10,000,000).
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Chapter 13 Solutions
INTERMEDIATE ACCOUNTING (LL) >CUSTOM<
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