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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Use the information in RE3-6, (a) assuming Ringo Company makes reversing entries, prepare the reversing entry on January 1, and the journal entry to record the payment of the note on April 1; and (b) assuming Ringo does not make reversing entries, prepare the journal entry to record the payment of the note on April 1.

To determine

Prepare journal entry to record the payment of the note on April 1, assume that (a) Company R makes reversing entry, and (b) Company R does not make reversing entry.

Explanation

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Reversing entries: Reversing entries are made at the beginning of the accounting period when the accountant needs to cancel adjusting entry made in the previous accounting period. Reversing entry will just reverse the adjusting entry and enables the company to simplify the recording of subsequent transactions related to the adjusting entry.

Rules of Debit and Credit: Following rules are followed for debiting and crediting different accounts while they occur in business transactions:

  • Debit, all increase in assets, expenses and dividends, all decrease in liabilities, revenues and stockholders’ equities.
  • Credit, all increase in liabilities, revenues, and stockholders’ equities, all decrease in assets and expenses.

Prepare journal entry to record the payment of the note on April 1 as follows:

(a) Company R makes reversing entry:

DateAccount Title and Explanation

Debit

($)

Credit

($)

January 1Interest payable1,350 
     Interest expense (1) 1,350
 (To record the reversing entry for the interest expense)  

Table (1)

  • Interest payable is a liability account and it decreases in the value of liabilities. Hence, debit the interest payable with $1,350.
  • Interest expense is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the interest expense with $1,350.

Working note (1):

Calculate the amount of interest expense.

Interest expense=[Note payable×Interest rate×(Number of months interest occruedMonths in a year)]=$20,000×9100×912(April 1 to December 31)=$1,350

DateAccount Title and Explanation

Debit

($)

Credit

($)

April 1Notes payable20,000 
 Interest expense (2)1,800 
 Cash 21,800
 (To record the principal and interest on note paid)  

Table (2)

  • Notes payable is a liability account and it decreases in the value of liabilities. Hence, debit the notes payable with $20,000.
  • Interest expense is component of shareholders’ equity, and it decreases the value of shareholders equity

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