Question

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

2016

Apr. 22 Purchased \(5,000 of merchandise on credit from Fox-Pro, terms n∕30. Warner uses the perpetual inventory system.

May 23 Replaced the April 22 account payable to Fox-Pro with a 60-day, \)4,600 note bearing 15% annual interest along with paying \(400 in cash.

July 15 Borrowed \)12,000 cash from Spring Bank by signing a 120-day, 10% interest-bearing note with a face value of \(12,000.

___?___ Paid the amount due on the note to Fox-Pro at maturity.

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

Dec. 6 Borrowed \)8,000 cash from City Bank by signing a 45-day, 9% interest-bearing note with a face value of $8,000.

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

2017

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

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. Fox-Pro, spring bank, and City bank maturity dates are22 July 2016,12 November 2016,and20 January 2017, respectively.
2. Fox-Pro, spring bank and City bank's interest due on maturity are$115,$400, and$90.
3. The interest expense recorded at the end of 2016 is$50.
4. The interest expense recorded at the end of 2017 is$40.
5. When the inventory is purchased on a credit basis, the merchandise inventory is debited, and the accounts payable are credited.

Step-by-step solution

Meaning of Note Payable

Note payable refers to a written document stating the promise to pay by one person to another to pay the specified sum on the future payment date

Maturity date of the bonds

The maturity date of the notes payable issued on May 23 is July 22, 2016.

The maturity date of the notes payable issued on July 15 is November 12, 2016.

The maturity date of the notes payable issued December 6 is January 20, 2017.

Interest due at the maturity of the bonds

$$\begin{gathered} InterestduetotheFox-Pro \\ Interest due= Principal \times Interest Rate\times Time Period \\ = \$4,600\times 15\%\times \frac{60}{360} \\ =\$115 \\ InterestduetotheSpringBank \\ Interest due= Principal \times Interest Rate\times Time Period \\ = \$12,000\times 10\%\times \frac{120}{360} \\ =\$400 \\ InterestduetoCitybank \\ Interest due= Principal \times Interest Rate\times Time Period \\ = \$8,000\times 9\%\times \frac{45}{360} \\ =\$90 \end{gathered}$$

Interest expense for 2016

$$\begin{gathered} \text{Amount\hspace{0.05em}of\hspace{0.05em}interest\hspace{0.05em}expense=\$8,000×}\frac{9}{100}\times \frac{25}{360} \\ =\$50 \end{gathered}$$

The amount of interest expense in 2017 was $40

Journal Entries

Date	Particulars	Debit ($)	Credit ($)
2016
April 22	Merchandise Inventory	5,000
	Accounts Payable		5,000
	(To record the purchase of inventory)
May 23	Accounts Payable	5,000
	Notes Payable		4,600
	Cash		400
	(To record the issue of notes payable)
July 15	Cash	12,000
	10% Notes Payable		12,000
	(To record entry for the issue of bond)
July 22	Notes Payable- Fox-Pro	4,600
	Interest Expense	115
	Cash		4,715
	(To record entry for maturity of the bonds)
Nov 12	Notes Payable- Spring Bank	12,000
	Interest Expense	400
	Cash		12,400
	( To record entry for maturity of the bonds)
Dec 6	Cash	8,000
	Notes Payable		8,000
	(To record entry for issue of bonds)
Dec 31	Interest Expense	50
	Interest Payable		50
	(Being entry for the interest payable)
2017
Jan 20	Notes Payable- City Bank	8,000
	Interest Expense	90
	Cash		8,090
	( To record entry for maturity of the bonds)