On December 1, 2013 Insto Photo Company purchased merchandise, invoice price $25
ID: 2479338 • Letter: O
Question
On December 1, 2013 Insto Photo Company purchased merchandise, invoice price $25,000, and issued a 12%, 120-day note to Ringi Chemicals Company. Insto uses the calendar year as its fiscal year and uses the perpetual inventory system.Prepare journal entries on Instos books to record the preceding information , including the adjusting entry at the end of the year and payment of the note at maturity. For a compound transaction. Assume a 360 day year On December 1, 2013 Insto Photo Company purchased merchandise, invoice price $25,000, and issued a 12%, 120-day note to Ringi Chemicals Company. Insto uses the calendar year as its fiscal year and uses the perpetual inventory system.
Prepare journal entries on Instos books to record the preceding information , including the adjusting entry at the end of the year and payment of the note at maturity. For a compound transaction. Assume a 360 day year
Prepare journal entries on Instos books to record the preceding information , including the adjusting entry at the end of the year and payment of the note at maturity. For a compound transaction. Assume a 360 day year
Explanation / Answer
Journal entry for December 1, 2013 when the notes are issued:
Cash a/c (Dr) $25,000
Notes payable a/c (Cr) $25,000
(As cash is received when notes payables are issued, cash is debited. Notes payable is a liability and hence is credited).
Entry at the end of the year i.e December 31, 2013:
No. of days from Dec 1 to Dec 31 = 31 days. Interest due = rate*amount*no. of days in december/360 = 12%*25,000*31/360 = $258.33
Thus, entry for this will be:
Interest expense a/c (Dr) $258.33
Interest payable a/c (Cr) $258.33
Payment at maturity = principal + interest. principal = 25,000. interest = 12%*25,000*120/360 = 1,000.
Thus entry on maturity:
Notes payable (Dr) $25,000
Interest payable (Dr) $1,000
Cash (Cr) $26,000
(The total amount standing as a liability in the interest payable account will be eliminated when it is actually paid).
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