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Intermediate Accounting: Reporting...

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

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Reversing Entries Thomas Company entered into two transactions involving promissory notes and properly recorded each transaction.

  1. 1. On November 1, it purchased land at a cost of $8,000. It made a $2,000 down payment and signed a note payable agreeing to pay the $6,000 balance in 6 months plus interest at an annual rate of 10%.
  2. 2. On December 1, it accepted a $4,200, 3-month, 12% (annual interest rate) note receivable from a customer for the sale of merchandise. On December 31, Thomas made the following related adjustments:

Chapter 3, Problem 13P, Reversing Entries Thomas Company entered into two transactions involving promissory notes and

Required:

  1. 1. Assuming that Thomas uses reversing entries, prepare journal entries to record:
    1. a. the January 1, reversing entries
    2. b. the March 1, $4,326 collection of the note receivable
    3. c. the May 1, $6,300 payment of the note payable
  2. 2. Assuming instead that Thomas does not use reversing entries, prepare journal entries to record the collection of the note receivable and the payment of the note payable.

1.

To determine

Prepare necessary reversing and journal entries for Company T.

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 any entry made in the previous accounting period. It is done in order to eliminate any errors that might have occurred in the calculation of the revenue or expenses and henceforth increase the efficiency of the financial statements for an improved decision making.

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 necessary reversing and journal entries for Company T as follows:

(a) Prepare reversing entries for January 1.

DateAccount Title and Explanation

Debit

($)

Credit

($)

January 1, 2020Interest payable100 
     Interest expense 100
 (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 $100.
  • Interest expense is component of shareholders’ equity, and it increases the value of shareholders equity. Hence, credit the interest expense with $100.
DateAccount Title and Explanation

Debit

($)

Credit

($)

January 1, 2020Interest revenue42 
     Interest receivable 42
 (To record the reversing entry for the interest revenue)  

Table (2)

  • Interest revenue is component of shareholders’ equity, and it decreases the value of shareholders equity. Hence, debit the interest revenue with $42.
  • Interest receivable is an asset account, and it decreases the value of asset...

2.

To determine

Prepare journal entries to record the collection of note receivable and the payment of the note payable, assume that the Company T does not use any reversing entries.

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