On April 1, the Snake River Racing Club (SRRC) purchased ten white-water rafts w

Question

On April 1, the Snake River Racing Club (SRRC) purchased ten white-water rafts with a cash price of $3,000 each. SRRC offered to pay for the rafts by making a $5,000 down payment and by singing a $25,000, 8 percent interest-bearing note. The interest and principal on this note would be due in one year.

(a) Prepare the appropriate journal entries in the accounting records of SRRC on the following dates:
1.) April 1, the date the sales agreement is finalized.
2.) December 31, the final day of SRRC

Explanation / Answer

1.) April 1, the date the sales agreement is finalized. Equipment (Dr.) 30000 Cash (Cr.) 5000 Note payable (Cr.) 25000 2.) December 31, the final day of SRRC’s fiscal year. Interest expense (Dr.) 1500 (25000*.08/12*9 months) Interest payable (Cr.) 1500 3.) April 1 of the following year, when the note matures. Interest expense (Dr.) 500 Interest payable (Dr.) 1500 Note payable (Dr.) 25000 Cash (Cr.) 27000 (b) Suppose that SRRC does not make and entry pertaining to this note payable in its accounting records on December 31. How will this oversight affect SRRC’s financial statements for the year ending December 31? For the following year? In the current year, the companies expenses would be understated and the liabilities would be understated. In the following year, the companies expenses would be overstated for that period because the full 2000 would be recorded as an expense when only 500 of the interest is from that year. Hope this helps!

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