[The following information applies to the questions displayed below]
Tyrell Co. entered into the following transactions involving short-term liabilities in 2014 and 2015
2014
Apr. 20 Purchased $36,000 of merchandise on credit from Locust, terms are 1/10, 1/30 Tyrell uses the
perpetual inventory system May 19 Replaced the April 20 account payable to Locust with a 90-day, $35,000 note bearing 9% annual
interest along with paying $1,000 in cash. July 8 Borrowed $66,000 cash from National Bank by signing a 120-day, 11% interest -bearing note with a face value of $66.000
7 Paid the smount due on the note to Locust at the maturity date.
Paid the amount due on the note to National Bank at the maturity date.
Nov. 28 Borrowed $30,000 cash from Fargo Bank by signing a 60-day, 7% interest-bearing note with a
face value of $30.000.
Dec. 31 Recorded an adjusting entry for accrued interest on the note to Fargo Bank
2015
Paid the amount due on the note to Fargo Bank at the maturity date.
The Correct Answer and Explanation is :
Tyrell Co.’s transactions in 2014 and 2015 involving short-term liabilities are as follows:
2014
- April 20: Purchased $36,000 of merchandise on credit from Locust, with terms 1/10, n/30.
- May 19: Replaced the April 20 account payable to Locust with a 90-day, $35,000 note bearing 9% annual interest, and paid $1,000 in cash.
- July 8: Borrowed $66,000 cash from National Bank by signing a 120-day, 11% interest-bearing note.
- August 17: Paid the amount due on the note to Locust at maturity.
- November 5: Paid the amount due on the note to National Bank at maturity.
- November 28: Borrowed $30,000 cash from Fargo Bank by signing a 60-day, 7% interest-bearing note.
- December 31: Recorded an adjusting entry for accrued interest on the note to Fargo Bank.
2015
- January 27: Paid the amount due on the note to Fargo Bank at maturity.
Explanation:
- April 20 Purchase: Tyrell Co. bought merchandise worth $36,000 on credit with terms 1/10, n/30. This means they could avail a 1% discount ($360) if paid within 10 days, reducing the payable amount to $35,640. However, since the payable was replaced with a note on May 19, it’s implied that the discount was not utilized.
- May 19 Note Issuance: The company replaced the $36,000 account payable with a $35,000 note and paid $1,000 in cash. This action settled the original payable. The 90-day note has a 9% annual interest rate. The interest for 90 days is calculated as follows: [
\text{Interest} = \$35,000 \times 9\% \times \frac{90}{365} = \$776.71
] - July 8 Loan: Tyrell Co. borrowed $66,000 from National Bank via a 120-day note with an 11% annual interest rate. The interest for 120 days is: [
\text{Interest} = \$66,000 \times 11\% \times \frac{120}{365} = \$2,386.85
] - August 17 Payment: The 90-day note to Locust matured on August 17 (90 days from May 19). Tyrell Co. paid the principal of $35,000 plus the accrued interest of $776.71, totaling $35,776.71.
- November 5 Payment: The 120-day note to National Bank matured on November 5 (120 days from July 8). The company paid the principal of $66,000 plus the accrued interest of $2,386.85, totaling $68,386.85.
- November 28 Loan: Tyrell Co. borrowed $30,000 from Fargo Bank via a 60-day note with a 7% annual interest rate. The interest for 60 days is: [
\text{Interest} = \$30,000 \times 7\% \times \frac{60}{365} = \$345.21
] - December 31 Adjusting Entry: By December 31, 33 days of the 60-day note had elapsed. The accrued interest is: [
\text{Accrued Interest} = \$30,000 \times 7\% \times \frac{33}{365} = \$189.86
] This amount was recorded as an adjusting entry to recognize the interest expense incurred up to year-end. - January 27 Payment: The 60-day note to Fargo Bank matured on January 27, 2015. Tyrell Co. paid the principal of $30,000 plus the total interest of $345.21, totaling $30,345.21. Since $189.86 of this interest was accrued in 2014, the remaining $155.35 was recognized as interest expense in 2015.
These transactions illustrate Tyrell Co.’s management of short-term liabilities through trade credit, promissory notes, and bank loans, along with the associated interest calculations and accounting entries.