Rob judson company had the following transactions involving
Rob Judson Company had the following transactions involving notes payable.
July 1, 2010 Borrows $50,000 from Third National Bank by signing a 9-month, 12% note.
Nov. 1, 2010 Borrows $60,000 from DeKalb State Bank by signing a 3-month, 10% note.
Dec. 31, 2010 Prepares adjusting entries.
Feb. 1, 20011 Pays principal and interest to DeKalb State Bank
Apr. 1, 20011 Pays principal and interest to Third National Bank
Instructions
Prepare journal entries for each of the transactions.Â
Rob judson company had the following transactions involving
Accounting Basics
The Correct Answer and Explanation is :
Here are the journal entries for each of the transactions involving notes payable for Rob Judson Company:
1. July 1, 2010: Borrows $50,000 from Third National Bank by signing a 9-month, 12% note.
Journal Entry:
Debit: Cash $50,000
Credit: Notes Payable $50,000Explanation: The company borrows $50,000 from Third National Bank and signs a 9-month note. The cash received is debited, and the notes payable liability is credited.
2. Nov. 1, 2010: Borrows $60,000 from DeKalb State Bank by signing a 3-month, 10% note.
Journal Entry:
Debit: Cash $60,000
Credit: Notes Payable $60,000Explanation: The company borrows an additional $60,000 from DeKalb State Bank. The journal entry recognizes the cash inflow and the liability for the note payable.
3. Dec. 31, 2010: Prepares adjusting entries.
Adjusting Entry for Third National Bank Note (9-month, 12%):
First, we calculate the interest for 6 months (July 1 to December 31):
- Interest = $50,000 × 12% × (6/12) = $3,000
Debit: Interest Expense $3,000
Credit: Interest Payable $3,000Adjusting Entry for DeKalb State Bank Note (3-month, 10%):
We calculate the interest for 2 months (November 1 to December 31):
- Interest = $60,000 × 10% × (2/12) = $1,000
Debit: Interest Expense $1,000
Credit: Interest Payable $1,000Explanation: The adjusting entries are necessary to recognize the accrued interest on both notes payable as of December 31, 2010. Interest expense is recognized and interest payable is credited for both notes.
4. Feb. 1, 2011: Pays principal and interest to DeKalb State Bank.
The company pays off the DeKalb State Bank note, including both principal and interest. The principal is $60,000, and the interest for 3 months is:
- Interest = $60,000 × 10% × (3/12) = $1,500
Journal Entry:
Debit: Notes Payable $60,000
Debit: Interest Payable $1,000 (from Dec 31, 2010)
Debit: Interest Expense $500 (additional interest for Jan)
Credit: Cash $61,500Explanation: The principal is paid off along with the interest due, which includes the accrued interest from the previous period and the new month’s interest.
5. Apr. 1, 2011: Pays principal and interest to Third National Bank.
The company pays off the Third National Bank note, which is a 9-month note. By this time, 8 months of interest has accrued. The interest for 9 months is:
- Interest = $50,000 × 12% × (9/12) = $5,400
Journal Entry:
Debit: Notes Payable $50,000
Debit: Interest Payable $3,000 (from Dec 31, 2010)
Debit: Interest Expense $2,400 (additional interest for Jan-Feb-Mar)
Credit: Cash $53,400Explanation: The company pays off the principal along with the interest due. The payment includes the accrued interest at the end of 2010, plus the interest from January to March.
Summary Explanation:
In each of the journal entries above, the company is recording the borrowing of money, the recognition of interest expense as it accrues, and the payment of principal and interest at the maturity dates. Adjusting entries are made to ensure that the financial statements accurately reflect the company’s financial position, particularly regarding the interest payable at year-end.