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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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Notes Payable On December 1, 2019, Insto Photo Company purchased merchandise, invoice price $25,000, and issued a 12%, 120-day note to Ringo Chemicals Company Insto uses the calendar year as its fiscal year and uses the perpetual inventory system.

Required:

Prepare journal entries on Insto’s books to record the preceding information, including the adjusting entry at the end of the year and payment of the note at maturity.

To determine

Prepare the journal entry and adjusting entry in the books of Company IP.

Explanation

Note payable: Note payable denotes a long-term liability that describes the amount borrowed, signed and issued note. The note carries all the details of payable amounts, interest amounts, and maturity dates.

Prepare the journal entry to record the purchase of inventory for note:

DateAccount title and explanationDebit ($)Credit ($)
December 1, 2019Inventory25,000 
 Notes payable (Company RC) 25,000
 (To record the purchase of inventory on note)  

Table (1)

  • Inventory is an asset account and it is increased. Therefore, debit inventory account with $25,000.
  • Notes payable is a liability account and is increased. Therefore, credit notes payable with $25,000.

Prepare the adjusting entry to record the interest expense:

DateAccount title and explanationDebit ($)Credit ($)
December 2019Interest expense (1)250 
 Interest payable 250
 (To record the accrued interest during the year 2019)  

Table (2)

Working note (1):

Calculate the amount of interest expense:

Interestexpense=Principalamount×Rateof interest×[1 month expired out of 4month maturity period]12months=$25,000 ×12×112=$250

  • Interest expense is an expense account and it decreases the shareholders’ equity

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