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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

Monte Cristo Products, which uses a perpetual inventory system, owed $770,000 on account for inventory purchased on November 1, 2020. The company’s fiscal year ends on December 31. Monte Cristo was unable to pay the amount owed by the February 1 due date because of financial difficulties. On February 1, 2021, it signed a $770,000, 12% interest-bearing note. This note was repaid with interest on September 1, 2021.

Required:

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

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

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

4. Prepare the entry recorded on September 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 November 2020.

Explanation

Purchase of inventory on account = $770,000

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 February 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 September 2021.

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