The
following are selected 2011 transactions of Darby Corporation.
Sept.
1 Purchased inventory from Orion Company on account for $50,000. Darby records
purchases gross and uses a periodic inventory system.
Oct.
1 Issued a $50,000, 12-month, 8% note to Orion in payment of Darby's account.
1
Borrowed $75,000 from the bank by signing a 12-month, non-interest-bearing
$81,000 note.
Instructions
(a)
Prepare journal entries for each transaction.
(b)
Prepare adjusting entries at December 31, 2011.
(c)
Calculate the net liability, in total, to be reported on the December 31, 2011
balance sheet for the following:
1.
The interest-bearing note
2.
The non-interest-bearing note
(d)
Prepare the journal entries for the payment of the notes at maturity.
(e)
Repeat part (d) assuming the company uses reversing entries (show the reversing
entries at January 1, 2012). Would the use of reversing entries be efficient
for both types of notes?
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(a)
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Sept. 1
|
Purchases.................................
|
50,000
|
|
|
|
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Accounts
Payable.....................
|
|
50,000
|
|
|
|
|
|
|
|
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Oct. 1
|
Accounts Payable..........................
|
50,000
|
|
|
|
|
Notes
Payable........................
|
|
50,000
|
|
|
|
|
|
|
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Oct. 1
|
Cash .....................................
|
75,000
|
|
|
|
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Notes
Payable........................
|
|
75,000
|
|
|
|
|
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(b)
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Dec. 31
|
Interest Expense..........................
|
1,000
|
|
|
|
|
Interest
Payable.....................
|
|
1,000
|
|
|
|
($50,000 X 8% X 3/12)
|
|
|
|
|
|
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|
|
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Dec. 31
|
Interest Expense..........................
|
1,500
|
|
|
|
|
Notes
Payable........................
|
|
1,500
|
|
|
|
[($81,000
– $75,000) X 3/12]
|
|
|
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(c)
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(1)
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Note payable
|
$50,000
|
|
|
|
Interest payable
|
1,000
|
|
|
|
|
$51,000
|
|
|
|
|
|
|
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(2)
|
Note payable
|
$75,000
|
|
|
|
Interest accrued
|
1,500
|
|
|
|
|
$76,500
|
|
(d)
|
Oct. 1/12
|
Interest Expense *.....................
|
3,000
|
|
|
|
|
Interest Payable.......................
|
1,000
|
|
|
|
|
Note Payable...........................
|
50,000
|
|
|
|
|
Cash...............................
|
|
54,000
|
|
|
|
*($50,000 X 8% X 9/12)
|
|
|
|
|
|
|
|
|
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Oct. 1/12
|
Interest Expense.......................
|
4,500
|
|
|
|
|
Notes
Payable......................
|
|
4,500
|
|
|
|
[($81,000 – $75,000) X 9/12]
|
|
|
|
|
|
|
|
|
|
|
|
Note Payable...........................
|
81,000
|
|
|
|
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Cash...............................
|
|
81,000
|
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(e)
|
|
Orion Note:
|
|
|
|
|
Jan. 1
|
Interest Payable......................
|
1,000
|
|
|
|
|
Interest
Expense.................
|
|
1,000
|
|
|
|
|
|
|
|
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Oct. 1
|
Interest Expense......................
|
4,000
|
|
|
|
|
Notes Payable.........................
|
50,000
|
|
|
|
|
Cash.............................
|
|
54,000
|
|
|
|
|
|
|
|
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Bank
Note:
|
|
|
|
|
|
The use of
reversing entries would be equally efficient for the non-interest-bearing
note. If the company uses a discount account and records the note at its face
value of $81,000, the use of reversing entries would not be as efficient.
|
||
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Jan. 1
|
Notes Payable.........................
|
1,500
|
|
|
|
|
Interest
Expense.................
|
|
1,500
|
|
|
|
|
|
|
|
|
Oct. 1
|
Interest Expense......................
|
6,000
|
|
|
|
|
Notes Payable.........................
|
75,000
|
|
|
|
|
Cash.............................
|
|
81,000
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