3. Notes payable . Red Bank Enterprises was involved in the following transactio

Question

3. Notes payable. Red Bank Enterprises was involved in the following transactions during the fiscal year ending October 31:

8/2:

Borrowed $75,000 from the Bank of Kingsville by signing a 120-day, 12% note.

8/20:

Issued a $40,000 note to Harris Motors for the purchase of a $40,000 de­livery truck. The note is due in 180 days and carries a 12% interest rate.

9/10:

Purchased inventory from Pans Enterprises in the amount of $15,000. Issued a 30-day, 12% note in settlement of the balance owed.

9/11:

Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and car­ries a 14% interest rate.

10/10:

The note to Pans Enterprises was paid in full.

10/11:        The note to Datatex Equipment was paid in full.

11/30:          Paid note to Bank of Kingsville

Instructions

a. Prepare journal entries to record the transactions.

b. Prepare adjusting entries on December 31 to record accrued interest (daily interest is calculated utilizing the 360 day method).

c. Prepare the Current Liability section of Red Bank%u2019s balance sheet as of December 31. Assume that the Accounts Payable account totals $203,600 on this date.

8/2:

Borrowed $75,000 from the Bank of Kingsville by signing a 120-day, 12% note.

8/20:

Issued a $40,000 note to Harris Motors for the purchase of a $40,000 de­livery truck. The note is due in 180 days and carries a 12% interest rate.

9/10:

Purchased inventory from Pans Enterprises in the amount of $15,000. Issued a 30-day, 12% note in settlement of the balance owed.

9/11:

Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and car­ries a 14% interest rate.

10/10:

The note to Pans Enterprises was paid in full.

Explanation / Answer

Hi,

Please find the answer as follows:

Part A:

August 2:

Cash Dr. 75000

Discount on Bonds Payable Dr. 4000

Notes Payable Cr. 79000

August 20:

Delivery Truck Dr. 40000

Notes Payable Cr. 40000

September 10:

Merchandise Inventory Dr. 15000

Notes Payable Cr. 15000

September 11:

Accounts Payable Dr. 60000

Notes Payable Cr. 60000

October 10:

Notes Payable Dr. 15000

Interest Expense (15000*.12*1/12) Dr. 150

Cash Cr. 15150

October 11

Notes Payable Dr. 60000

Interest Expense (15000*.14*1/12) Dr. 700

Cash Cr. 60700

November 30

Notes Payable Dr. 79000

Cash Cr. 79000

Part B:

October 31

Interest Expense (4000*90/120) Dr. 3000

Discount on Notes Payable Cr. 3000

October 31

Interest Expense (40000*.12*72/360) Dr. 960

Interest Payable Cr. 960

Part C:

Thanks.

Current Liabilities:

Accounts Payable
203600 Notes Payable 119000
Less: Discount on Notes Payable 1000 118000 Interest Payable
960 Total Current Liabilities
322560

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