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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Interest-Bearing Note Replacing an Unpaid Account Payable

Conti Products owed $80,000 on account for inventory purchased on December 1, 2020. Conti uses a perpetual inventory system and has a fiscal year that ends on December 31. Conti was unable to pay the amount owed by the March 1, 2021, due date because of financial difficulties. On March 1, 2021, Conti signed a 4-month, $80,000, 6% interest-bearing note. This note was repaid with interest on July 1, 2021.

Required:

1. Prepare the entry recorded on December 1, 2020.

2. Prepare the adjusting entry recorded on December 31, 2020.

3. Prepare the entry recorded on March 1, 2021.

4. Prepare the entry recorded on July 1, 2021.

To determine

(a)

Introduction:

The company issues notes payable to the lender as a promise to pay the principal amount along with the stated interest on specified date.

To record:

Journal entry on 1st December 2020.

Explanation

Purchase of inventory on account = $80,000

Debit what comes in, Credit what goes out.

Inventory is coming in so it will be debited whereas accounts payable will be credited.

Journal entry to record purchase of inventory on account

To determine

(b)

Introduction:

The company issues notes payable to the lender as a promise to pay the principal amount along with the stated interest on specified date.

To record:

Adjusting entry on 31st December 2020.

To determine

(c)

Introduction:

The company issues notes payable to the lender as a promise to pay the principal amount along with the stated interest on specified date.

To record:

Journal entry on 1st March 2021.

To determine

(d)

Introduction:

The company issues notes payable to the lender as a promise to pay the principal amount along with the stated interest on specified date.

To record:

Journal entry on 1st July 2021.

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