Chapter 11, Problem 1AP

1.

To determine

Identify the maturity date for each of the three notes described.

Explanation of Solution

Notes payable:

Notes Payable is a written promise to pay a certain amount on a future date, with certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs.

Maturity date:

The date on which the borrower should pay the principal amount of loan, or bond, is referred to as maturity date.

Particulars	Company L	Bank NBR	Bank F
Date of  note	19th   May	8th  July	28th November
Terms of the note ( in days)	90	120	60
Maturity date	17th  August	5th November	27th   January

(Table 1)

2.

To determine

Identify the interest due at maturity for each of the three notes.

Explanation of Solution

Calculate the interest due at maturity for the note bearing an amount of $35,000.

$\begin{array}{c}\begin{array}{c}\text{Interest due at maturity for }\\ \text{the note bearing \$35,000 }\end{array}\}\text{= }\left(\begin{array}{l}\text{Principal amount}\times \text{ Annual interest rate }\\ \times \text{ Time period}\end{array}\right)\\ =\$35,000\times 10\%\times \frac{90}{360}\\ =\$875\end{array}$

Therefore, the interest due at maturity for the note bearing an amount of $35,000 is $875.

Calculate the interest due at maturity for the note bearing an amount of $80,000.

$\begin{array}{c}\begin{array}{c}\text{Interest due at maturity for }\\ \text{the note bearing \$80,000 }\end{array}\}\text{= }\left(\begin{array}{l}\text{Principal amount}\times \text{ Annual interest rate }\\ \times \text{ Time period}\end{array}\right)\\ =\$80,000\times 9\%\times \frac{120}{360}\\ =\$2,400\end{array}$

Therefore, the interest due at maturity for the note bearing an amount of $80,000 is $2,400.

Calculate the interest due at maturity for the note bearing an amount of $42,000.

$\begin{array}{c}\begin{array}{c}\text{Interest due at maturity for }\\ \text{the note bearing \$42,000 }\end{array}\}\text{= }\left(\begin{array}{l}\text{Principal amount}\times \text{ Annual interest rate }\\ \times \text{ Time period}\end{array}\right)\\ =\$42,000\times 8\%\times \frac{60}{360}\\ =\$560\end{array}$

Therefore, the interest due at maturity for the note bearing an amount of $42,000 is $560.

3.

To determine

Identify the interest expense to be recorded in the adjusting entry at the end of Year 1.

Explanation of Solution

$\begin{array}{c}\begin{array}{l}\text{Accrued interest on Bank F }\\ \text{note at the end of Year 1}\end{array}\}=\left(\text{Total interest on note × Time period for the term Year 1}\right)\\ =\$560\times \frac{33}{60}\\ =\$308\end{array}$

Therefore, the interest expense recorded in the adjusting entry at the end of Year 1 is $308.

4.

To determine

Identify the interest expense to be recorded in Year 2.

Explanation of Solution

$\begin{array}{c}\begin{array}{l}\text{Interest on Bank F }\\ \text{note in Year 2}\end{array}\}=\left(\text{Total interest on note × Time period for the term Year 2}\right)\\ =\$560\times \frac{27}{60}\\ =\$252\end{array}$

Therefore, the interest expense recorded in Year 2 is $252.

To determine

Prepare journal entry to record the given transaction and events.

Explanation of Solution

Prepare journal entry to record the given transaction and events.

Date	Account title and Explanation	Debit in $	Credit in $
April 20, Year 1	Merchandise  inventory	40,250
	Accounts payable to Company L		40,250
	(To record the purchase of merchandise on credit)
May 19	Accounts payable to  Company L	40,250
	Cash		5,250
	Notes payable-Company L		35,000
	(Paid $5,250 cash and gave a 90-day,  10% note to extend due date on account)
July 8	Cash	80,000
	Notes payable –Bank NBR		80,000
	(Borrowed cash with a 120-day, 9% note.)
August 17	Interest expense	875
	Notes payable –Company L	35,000
	Cash		35,875
	(Paid note with interest.)
November 5	Interest expense	2,400
	Notes payable –Bank NBR	80,000
	Cash		82,400
	(Paid note with interest.)
November 28	Cash	42,000
	Notes payable –Bank F		42,000
	(Borrowed cash with 60-day, 8% note.)
December 31	Interest expense	308
	Interest payable		308
	(Accrued interest on note payable.)
January 27, Year 2	Interest expense	252
	Notes payable- Bank F	42,000
	Interest payable	308
	Cash		42,560
	(Paid note with interest.)

(Table 2)