Question

Question Tyrell Co. entered into the following transactions involving short-term liabilities in 2016 and 2017.

2016

Apr. 20 Purchased \(40,250 of merchandise on credit from Locust, terms n∕30. Tyrell uses the perpetual

inventory system.

May 19 Replaced the April 20 account payable to Locust with a 90-day, \)35,000 note bearing 10%

annual interest along with paying \(5,250 in cash.

July 8 Borrowed \)80,000 cash from NBR Bank by signing a 120-day, 9% interest-bearing note with a

face value of \(80,000.

___?___ Paid the amount due on the note to Locust at the maturity date.

___?___ Paid the amount due on the note to NBR Bank at the maturity date.

Nov. 28 Borrowed \)42,000 cash from Fargo Bank by signing a 60-day, 8% interest-bearing note with a

face value of $42,000.

Dec. 31 Recorded an adjusting entry for accrued interest on the note to Fargo Bank.

2017

___?___ Paid the amount due on the note to Fargo Bank at the maturity date.

Required

1. Determine the maturity date for each of the three notes described.

2. Determine the interest due at maturity for each of the three notes. (Assume a 360-day year.)

3. Determine the interest expense to be recorded in the adjusting entry at the end of 2016.

4. Determine the interest expense to be recorded in 2017.

5. Prepare journal entries for all the preceding transactions and events for years 2016 and 2017.

Short answer

Answer

1. Maturity dates are given below.
2. Interest due is $560
3. Interest expenses is $3,583
4. The interest payable at the end of the year is $252.
5. Interest expenses is $308

Step-by-step solution

Maturity date of the bonds

The maturity date of the bonds purchased on May 19 is August 17, 2016.

The maturity date of the bonds purchased on July 8 is November 5, 2016.

The maturity date of the bonds issued on November 28 is January 27, 2017.

Interest due at the maturity of the bonds

$$\begin{gathered} \text{InterestduetotheLocustbonds} \\ \text{InterestDue=Pricipal×interestrate×Timeperiod} \\ =\$35000\times 10\%\times \frac{90}{360} \\ =\$875 \\ \text{InterestduetotheNBRBank} \\ \text{InterestDue=Pricipal×interestrate×Timeperiod} \\ =\$80000\times 9\%\times \frac{120}{360} \\ =\$2,400 \\ \text{InterestduetoFargobank} \\ \text{InterestDue=Pricipal×interestrate×Timeperiod} \\ =\$42000\times 8\%\times \frac{60}{360} \\ =\$560 \end{gathered}$$

Interest expense for 2016

$$\begin{gathered} \text{Amount} \text{of} \text{interest} \text{expense =} \text{Interest} \text{of} \text{Locust +} \text{Interest} \text{of} \text{NBR} \text{Bank +} \text{Interest} \text{of} \text{Fargo} \text{Bank} \\ \text{=} \text{\$ 875 +} \text{\$ 2,400} \text{+} \text{\$ 308} \\ \text{= \$ 3,583} \end{gathered}$$

Interest Expense for 2017

The amount of interest expense in 2017 was $252.

Journal Entries

Date	Particulars	Debit	Credit
April 20, 2016	Merchandise Inventory	$40,250
	Accounts Payable		$40,250
	(Being entry for the purchase of the inventory)
May 19, 2016	Accounts Payable	$40,250
	Notes Payable		$35,000
	Cash		$5,250
	(Being entry for the issue of notes payable)
July 8, 2016	Cash	$80,000
	9% Notes Payable		$80,000
	(Being entry for the issue of bond)
August 17, 2016	Notes Payable- Locust	$35,000
	Interest Expense	$875
	Cash		$35,875
	(Being entry for the maturity of the bonds)
November 5, 2016	Notes Payable- Locust	$80,000
	Interest Expense	$2,400
	Cash		$82,400
	(Being entry for the maturity of the bonds)
November 28, 2016	Cash	$42,000
	Notes Payable		$42,000
	(Being entry for the issue of bonds)
December 31, 2016	Interest Expense	$308
	Interest Payable		$308
	(Being entry for the interest payable)