Accouting Solution 6.3 (Accounting for Advanced Accruals)
General journal entries are as follows:
| No |
Explanations |
Account titles |
Debit |
Credit |
| Transactions of 20X8 |
||||
| 1 |
To record the note issued | Cash Discount on Notes Payable Note Payable |
4,750 (2) |
5,000 |
| 2 |
(Adjusting entry) To record interest expense | Interest Expense Discount on Notes Payable |
166.7 (3) |
|
| Transactions of 20X9 |
||||
| 3 |
(On April 31) To record interest expense | Interest Expense Discount on Notes Payable |
83.3 (4) |
83.3 (4) |
| 4 |
(On April 31) To pay cash for the note | Note Payable Cash |
5,000 |
5,000 |
Notes:
(1) The discount amount: $5,000 x 5% = $250
(2) The principal amount: $5,000 - $250 = $4,750
(3) The interest expense for 8 months (May - Dec, 20X8): $250 x (8 / 12)
= $166.7 (rounded)
(4) The amount of interest expense for 4 months (Jan - Apr, 20X9): $250
x (4 / 12) = $83.3 (rounded).
T-accounts follow here (without closing entries):
| For 20X8 |
|||||||
| Assets |
= |
Liabilities |
+ |
Equity |
|||
| Cash |
Notes Payable |
Contributed Capital |
|||||
| Beg. 600 | Beg. 0 | Beg. 300 | |||||
| (1) 4,750 | (1) 5,000 | End. 300 | |||||
| Bal. 5,350 | Bal. 5,000 | ||||||
| |
Retained Earnings |
||||||
| Discount on Note |
|
Beg. 300 | |||||
| Payable |
End. 300 | ||||||
| Beg. 0 | (2) 166.7 | ||||||
| (1) 250 | Interest Expense |
||||||
| Bal. 83.3 | Beg. 0 | ||||||
| (2) 166.7 | |||||||
| Bal. 166.7 |
|||||||
| For 20X9 |
|||||||
| Assets |
= |
Liabilities |
+ |
Equity |
|||
| Cash |
Notes Payable |
Contributed Capital |
|||||
| Beg. 5,350 | (4) 5,000 | (4) 5,000 | Beg. 5,000 | Beg. 300 | |||
| (1) 4,750 | End. 300 | ||||||
| Bal. 350 | Bal. 0 | ||||||
| |
Retained Earnings |
||||||
| Discount on Note |
|
Beg. 300 | |||||
| Payable |
End. 300 | ||||||
| Beg. 83.3 | (3) 83.3 | ||||||
| Interest Expense |
|||||||
| Bal. 0 | Beg. 166.7 | ||||||
| (3) 83.3 | |||||||
| Bal. 250 |
|||||||
Location