Question 2 (a) Date Account Titles and Explanation Debit Credit Question 2 Littl

Question

Question 2

(a)

Date

Account Titles and Explanation

Debit

Credit

Question 2

Little Corp. was experiencing cash flow problems and was unable to pay its $104,400 account payable to Big Corp. when it fell due on September 30, 2014. Big agreed to substitute a one-year note for the open account. The following two options were presented to Little by Big Corp.:
Option 1: A one–year note for $104,400 due September 30, 2015. Interest at a rate of 8% would be payable at maturity. Option 2: A one–year non–interest–bearing note for $112,752. The implied rate of interest is 8%.
Assume that Big Corp. has a December 31 year end.

(a)

Assuming Little Corp. chooses Option 1, prepare the entries required on Big Corp.’s books on September 30, 2014, December 31, 2014, and September 30, 2015.

Date

Account Titles and Explanation

Debit

Credit

September 30, 2014December 31, 2014September 30, 2015

September 30, 2014December 31, 2014September 30, 2015

September 30, 2014December 31, 2014September 30, 2015

Explanation / Answer

1- 8% one year note on little corp debit         104400

    credit bills receivable of little corp                           104400

2- dec.31     accrued interest income debit 2088

                    credit interest income                     2088

3- 30 september

                              cash             debit                 112752

                              credit 8% one year note on little corp      104400

                              credit accured interest income                                    2088

                              credit interest income                                        6264

             

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