Chapter 9, Problem 6BTN

To determine

Notes Payable:

Notes payable is a promissory note that is issued by the borrower to obtain a specific amount of money which the borrower promises to pay within a year on a specific date. It’s a kind of current liability.

Journal Entries:

Journal entries are the accounting transaction used to identify which accounts has been debited and credited in the journal. In the journal entries for every debit there must be a correspondence credit.

Rules of Journal Entries:

• To increases balance of account: Assets Debit, Liabilities Credit, Expenses Debit, Revenue Credit, Capital Credit
• To decreases balance of account: Assets Credit, Liabilities Debit, Expenses Credit, Revenue Debit, Capital Debit

1.

To identify: The best option.

Explanation of Solution

Option A: To borrow $6,000 as on June 1 for 90 days bearing the interest at10%.

Calculation of interest expenses of option A.

Given,

Principal is $6,000.

Rate of interest is 10%.

Time is 90 days.

Formula to calculate interest expense,

  $\text{Interest}\text{expense}=\frac{\text{Principal}\times \text{Rate}\text{of}\text{interest}\times \text{Time}}{100}$

Substitute $6,000 for principal, 10% for rate o interest and 90 days for time.

  $\begin{array}{c}\text{Interest}\text{expenses}=\frac{\$6,000\times 10\times 90}{100\times 360}\\ =\$150\end{array}$

The interest expenses for the option A is $150.

Option B: To borrow $6,000 as on June 1 for 120days bearing the interest at 8%.

Calculation of interest expenses for option B.

Given,

Principal is $6,000.

Rate of interest is 8%.

Time is 120 days.

Formula to calculate interest expense,

  $\text{Interest}\text{expenses}=\frac{\text{Principal}\times \text{Rate}\text{of}\text{interest}\times \text{Time}}{100}$

Substitute $6,000 for principal, 8% for rate of interest and 120 days for time.

  $\begin{array}{c}\text{Interest}\text{expense}=\frac{\$6,000\times 8\times 120}{100\times 360}\\ =\$160\end{array}$

The interest expenses for the option B is $160.

Since, the interest rate for option A is higher than the option B, but the interest expense for option B is higher than option A because in option A the time for borrow the loan is 90 days whereas for option B is it 120days.

So if the company prefer interest cost so option A is preferable but if the company prefer addition time to used to loan the option B should be prefer the company only has to pay $10 more for the additional 30days to used the loan for option B.

The total number of days in a year is to be rounded to 360.

2.

To determine

To prepare: Journal entries.

Explanation of Solution

a.

Option A-at the date of issuance

Date	Account title and explanation	Post ref	Debit($)	Credit($)
June 1	Cash		6,000
	Notes payable			6,000
	(Being the notes payable issued)

Table (1)

• Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
• Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.

b.

Option B-at the date of issuance

Date	Account title and explanation	Post ref	Debit($)	Credit($)
June 1	Cash		6,000
	Notes payable			6,000
	(Being the notes payable issued)

Table (2)

• Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
• Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.

c.

Option A-at maturity date

Date	Account title and explanation	Post ref	Debit($)	Credit($)
August 31	Notes payable		6,000
	Interest payable		150
	Cash			6150
	( Being the notes payable ha s been matured and amount of interest has been due )

Table (3)

• Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
• Interest payable is an expense and it is increases by $150 therefore it is debited by $160.
• Cash is an assets and cash is decrease by $6,150 so cash is credited by $6,150.

d.

Option B-at maturity date

Date	Account title and explanation	Post ref	Debit($)	Credit($)
Sept 30	Notes payable		6,000
	Interest payable		160
	Cash			6160
	( Being the notes payable ha s been matured and amount of interest has been due )

Table (4)

• Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
• Interest payable is an expense and it is increases by $160 therefore it is debited by $160.
• Cash is an assets and cash is decrease by $6,160 so cash is credited by $6,160.

3.

To determine

To explain:-the journal entries prepare in part 2

a.

Option A-at the date of issuance

• Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
• Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.

b.

Option B-at the date of issuance

• Cash is of nature of assets and cash is increases by 6,000 so cash is debited by 6,000.
• Notes payable is a nature of liability and it is increases by 6,000 therefore it is credit by 6,000.

c.

Option A-at maturity date

• Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
• Interest payable is an expense and it is increases by $150 therefore it is debited by $160.
• Cash is an assets and cash is decrease by $6,150 so cash is credited by $6,150.

d.

Option B-at maturity date

• Notes payable is a liability and it is decreases by $6,000 therefore notes payable is debited by $6,000.
• Interest payable is an expense and it is increases by $160 therefore it is debited by $160.
• Cash is an assets and cash is decrease by $6,160 so cash is credited by $6,160.

4.

To prepare:-Journal entries assuming that the funds are borrowed on 1^st December.

Explanation of Solution

a.

Option A-the year end adjustment

Date	Account title and explanation	Post ref	Debit($)	Credit($)
Dec 31	Interest expense		50
	Interest payable			50
	(Being the amount of interest become due)

Table (5)

• Interest is an expense which increases and has due on December 31 so it is debited by $50.
• Interest payable is a liability and it is increases by $50 so it is credited by $50.

Working notes:

Calculation of amount of interest expenses on December 31

Formula to calculate the amount of interest expenses,

  $\text{Interest}\text{expenses}=\frac{\text{Principal}\times \text{Rate}\text{of}\text{interest}\times \text{Time}}{100}$

Substitute $6,000 for principal amount 10% for rate of interest and 30 days for time.

  $\begin{array}{c}\text{Interest}\text{expenses}=\frac{\$6000\times 10\times 30}{100\times 360}\\ =\$50\end{array}$

b.

Option B- the year end adjustment

Date	Account title and explanation	Post ref	Debit($)	Credit($)
Dec 31	Interest expense		40
	Interest payable			40
	(Being the amount of interest become due)

Table (6)

• Interest is an expense which increases and has due on 31^stDecember so it is debited by $40.
• Interest payable is a liability and it is increases by $40 so it is credited by $50.

Working notes:

Calculation of amount of interest expenses on December 31

Formula to calculate the amount of interest expenses,

  $\text{Interest}\text{expenses}=\frac{\text{Principal}\times \text{Rate}\text{of}\text{interest}\times \text{Time}}{100}$

Substitute $6,000 for principal amount 8% for rate of interest and 30 days for time.

  $\begin{array}{c}\text{Interest}\text{expenses}=\frac{\$6000\times 8\times 30}{100\times 360}\\ =\$40\end{array}$

c.

Option A-at maturity date

Date	Account title and explanation	Post ref	Debit($)	Credit($)
Feb 28	Interest expenses		100
	Interest payable		50
	Notes payable		6,000
	Cash			6,150
	(Being the notes payable has been mature)

Table (7)

• Interest is an expense and it is increases by $100 therefore it is debited
• Interest payable is a liability and it is decrease by $50 therefore it is credited
• Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
• Cash is an asset and it is decreases therefore it is debited by $6,150

Working notes:

Calculation of amount of interest expenses on February 28

Formula to calculate the amount of interest expenses,

  $\text{Interest}\text{expenses}=\frac{\text{Principal}\times \text{Rate}\text{of}\text{interest}\times \text{Time}}{100}$

Substitute $6,000 for principal amount 10% for rate of interest and 60 days for time.

  $\begin{array}{c}\text{Interest}\text{expenses}=\frac{\$6000\times 10\times 60}{100\times 360}\\ =\$100\end{array}$

d.

Option B-at the maturity date

Date	Account title and explanation	Post ref	Debit($)	Credit($)
Feb 28	Interest expenses		120
	Interest payable		40
	Notes payable		6,000
	Cash			6,160
	(Being the notes payable has been mature)

Table (8)

• Interest is an expense and it is increases by $120therefore it is debited
• Interest payable is a liability and it is decrease by $40 therefore it is credited
• Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
• Cash is an asset and it is decreases therefore it is debited by $6,160

Working note:

Calculation of amount of interest payable on February 28

Formula to calculate the amount of interest expenses,

  $\text{Interest}\text{expenses}=\frac{\text{Principal}\times \text{Rate}\text{of}\text{interest}\times \text{Time}}{100}$

Substitute $6,000 for principal amount 8% for rate of interest and 90 days for time.

  $\begin{array}{c}\text{Interest}\text{expenses}=\frac{\$6000\times 8\times 90}{100\times 360}\\ =\$120\end{array}$

5.

To explain: The journal entries prepare in part 4.

a.

Option A-the year end adjustment

• Interest is an expense which increases and has due on 31^stDecember so it is debited by $50.
• Interest payable is a liability and it is increases by $50 so it is credited by $50.

b.

Option B- the year end adjustment

• Interest is an expense which increases and has due on 31^stDecember so it is debited by $40.
• Interest payable is a liability and it is increases by $40 so it is credited by $50.

c.

Option A-at maturity date

• Interest is an expense and it is increases by $100 therefore it is debited
• Interest payable is a liability and it is decrease by $50 therefore it is credited
• Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
• Cash is an asset and it is decreases therefore it is debited by $6,150

d.

Option B-at the maturity date

• Interest is an expense and it is increases by $120therefore it is debited
• Interest payable is a liability and it is decrease by $40 therefore it is credited
• Notes payable is a liability and it has been due so it will decrease therefore it is debited by $6,000
• Cash is an asset and it is decreases therefore it is debited by $6,160.