91Ó°ÊÓ

(Current Liability Entries and Adjustments) Described below are certain transactions of Edwardson Corporation. The company uses the periodic inventory system.

1. On February 2, the corporation purchased goods from Martin Company for \(70,000 subject to cash discount terms of 2/10, n/30. Purchases and accounts payable are recorded by the corporation at net amounts after cash discounts. The invoice was paid on February 26.

2. On April 1, the corporation bought a truck for \)50,000 from General Motors Company, paying \(4,000 in cash and signing a 1-year, 12% note for the balance of the purchase price.

3. On May 1, the corporation borrowed \)83,000 from Chicago National Bank by signing a \(92,000 zero-interest-bearing note due 1 year from May 1.

4. On August 1, the board of directors declared a \)300,000 cash dividend that was payable on September 10 to stockholders of record on August 31.

Instructions

(a) Make all the journal entries necessary to record the transactions above using appropriate dates.

(b) Edwardson Corporation’s year-end is December 31. Assuming that no adjusting entries relative to the transactions above have been recorded, prepare any adjusting journal entries concerning interest that are necessary to present fair financial statements at December 31. Assume straight-line amortization of discounts.

Step by step solution

01

Definition of Zero-Interest Bearing Note

The notes issued by the business entity that does not have a coupon rate are known as zero-interest bearing notes. These notes are generally issued at a lower cost than their actual cost and redeemed at par.

02

Journal entries for the transactions

Date	Accounts and Explanation	Debit $	Credit $
2 Feb	Purchase$\left(\$70,000×98\%\right)$	$68,600
	Account payable		$68,600
26 Feb	Account payable	$68,600
	Discount lost	$1,400
	Cash		$70,000
1 April	Truck	$50,000
	Cash		$4,000
	Note payable		$46,000
1 May	Cash	$83,000
	Discount on notes payable	$9,000
	Zero-interest bearing		$92,000
1 Aug	Retained earnings	$300,000
	Dividend payable		$300,000
10 Sep	Dividend payable	$300,000
	Cash		$300,000
		$880,600	$880,600

03

Adjusting journal entry for interest

Date	Accounts and Explanation	Debit $	Credit $
1	No adjusting entry
2	Interest expenses $\left(\$46,000×12\%×\frac{9}{12}\right)$	$4,140
	Interest payable		$4,140
3	Interest expensesrole="math" localid="1660153260888" $\left(\$9,000×\frac{8}{12}\right)$	$6,000
	Discount on note payable		$6,000
4	No adjusting entry
		$10,140	$10,140

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