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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
Section
BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

REQUIRED

Prepare general journal entries on the books of both Mirror Co. and the other party (either Rosman Co., Kaw County Bank, or Lawrence Bank) for each of the following transactions:

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To determine

Prepare journal entries in the books of both Company M, and other parties like Company R, KC Bank, and Bank L for each of the following transactions.

Explanation

Prepare journal entries in the books of Company M.

DateAccount titles and ExplanationDebitCredit
June 1Notes receivable$3,000
     Accounts receivable$3,000
(To record received note to settle account)
June 20Cash$1,976.67
Discount on notes payable (1)$23.33
     Notes payable$2,000
(To record note issued for bank loan)
July 1Cash (2)$3,009.47
     Notes receivable$3,000
     Interest revenue (3)$9.47
(To record discounted note to Company R)
August 19Notes payable$2,000
Interest expense$23.33
     Cash$2,000
     Discount on notes payable$23.33
(To record note paid at maturity)
August 30No journal entry required

Table (1)

Working notes:

(1) Calculate discount on notes payable.

Discount on notes payable =Notes payable×Interest rate×Time period=$2,000×7%×60360=$23.33

(2) Calculate cash proceeds.

Cash proceeds =Maturity value Discount amount (Difference in time period)=($3,000+($3,000×6%×90360))($3,045×7%×60360)=$3,045$35.53=$3,009.47

(3) Calculate interest revenue.

Interest revenue =Cash proceedsNotes receivable= $3,009.47$3,000=$9.47

As on 1st June:

  • Notes receivable is a current asset, and it is increased. Therefore, debit notes receivable account for $3,000.
  • Accounts receivable is a current asset, and it is decreased. Therefore, credit accounts receivable account for $3,000.

As on 20th June:

  • Cash is a current asset, and it is increased. Therefore, debit cash account for $1,976.67.
  • Discount on notes payable is a contra liability, and it is increased. Therefore, debit discount on notes payable account for $23.33.
  • Notes payable is a current liability, and it is increased. Therefore, credit notes payable account for $2,000.

As on 1st July:

  • Cash is a current asset, and it is increased. Therefore, debit cash account for $3,009.47.
  • Notes receivable is a current asset, and it is decreased. Therefore, credit notes receivable account for $3,000.
  • Interest revenue is a component of stockholders’ equity, and it increases revenue accounts. Therefore, credit interest revenue account for $9.47.

As on 19th August:

  • Notes payable is a current liability, and it is decreased. Therefore, debit notes payable account for $2,000

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