Red Bank Enterprises was involved in the following transactions during the fiscal year ending October 31:
8/2: Borrowed $75,000 from the Bank of Kingsville by signing a 120-day note.
8/20: Issued a $40,000 note to Harris Motors for the purchase of a $40,000 delivery truck. The note is due in 180 days and carries a 12% interest rate.
9/10: Purchased merchandise from Pans Enterprises in the amount of $15,000. Issued a 30-day, 12% note in settlement of the balance owed.
9/11: Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and carries a 14% interest rate.
10/10: The note to Pans Enterprises was paid in full.
10/31: The note to Datatex Equipment was paid in full.
11/30: Paid note to Bank of Kingville
Instructions
a. Prepare journal entries to record the transactions.
b. Prepare adjusting entries on October 31 to record accrued interest.
c. Prepare the Current Liability section of Red Bank’s balance sheet as of October 31. Assume that the Accounts Payable account totals $203,600 on this date.
a. To prepare the journal entries, we need to analyze each transaction and determine the accounts that are affected. Here are the journal entries for each transaction:
8/2: Borrowed $75,000 from the Bank of Kingsville by signing a 120-day note.
Debit Cash $75,000 (increase in cash)
Credit Notes Payable $75,000 (increase in liabilities)
8/20: Issued a $40,000 note to Harris Motors for the purchase of a $40,000 delivery truck. The note is due in 180 days and carries a 12% interest rate.
Debit Delivery Truck $40,000 (increase in assets)
Credit Notes Payable $40,000 (increase in liabilities)
9/10: Purchased merchandise from Pans Enterprises in the amount of $15,000. Issued a 30-day, 12% note in settlement of the balance owed.
Debit Merchandise Inventory $15,000 (increase in assets)
Credit Notes Payable $15,000 (increase in liabilities)
9/11: Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and carries a 14% interest rate.
Debit Accounts Payable $60,000 (decrease in liabilities)
Credit Notes Payable $60,000 (increase in liabilities)
10/10: The note to Pans Enterprises was paid in full.
Debit Notes Payable $15,000 (decrease in liabilities)
Credit Cash $15,000 (decrease in cash)
10/31: The note to Datatex Equipment was paid in full.
Debit Notes Payable $60,000 (decrease in liabilities)
Credit Cash $60,000 (decrease in cash)
11/30: Paid note to Bank of Kingsville
Debit Notes Payable $75,000 (decrease in liabilities)
Credit Cash $75,000 (decrease in cash)
b. To prepare the adjusting entries on October 31 to record accrued interest, we need to calculate the interest expense based on the outstanding notes payable and the interest rate.
Interest on the note to Harris Motors (8/20 transaction):
Principal ($40,000) x Interest Rate (12%) x Time (2 months/12 months) = $800
Interest on the note to Datatex Equipment (9/11 transaction):
Principal ($60,000) x Interest Rate (14%) x Time (1 month/12 months) = $700
In this case, we assume that the interest is calculated monthly.
The adjusting entries would be:
Debit Interest Expense $1,500 (increase in expenses)
Credit Interest Payable $1,500 (increase in liabilities)
c. To prepare the Current Liability section of Red Bank’s balance sheet as of October 31, we need to list all the current liabilities, including the accounts payable and the notes payable.
Current Liabilities:
Accounts Payable: $203,600 (given)
Notes Payable:
- Harris Motors Note: $40,000
- Pans Enterprises Note: $0 (paid on 10/10)
- Datatex Equipment Note: $0 (paid on 10/31)
- Bank of Kingsville Note: $0 (paid on 11/30)
Total Current Liabilities: $243,600 ($203,600 + $40,000)
Note: The interest payable ($1,500) from the adjusting entry is also a current liability, but it's not included in the given accounts payable total.