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Chapter 11: Problem 5

A business issued a 60-day note for \(\$ 45,000\) to a creditor on account. The note was discounted at \(6 \%\). Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity.

Short Answer

Expert verified
Debit Accounts Receivable, credit Notes Payable at issuance; at maturity, debit Notes Payable and Interest Expense, credit Cash.

Step by step solution

01

Understanding the Details of the Note

The business issued a 60-day note worth \( \$45,000 \). This note bears an interest rate of \(6\%\), which means the interest needs to be calculated for the period.
02

Calculate Interest on the Note

The interest on a note is calculated using the formula \( \text{Interest} = \text{Principal} \times \text{Rate} \times \text{Time} \). For our note: \( \text{Interest} = 45000 \times 0.06 \times \frac{60}{365} = \\(442.47 \approx \\)450\) to be concise for journal entry purposes.
03

Journal Entry for Issuance of the Note

When the note is issued, the business records it by debiting Accounts Receivable and crediting Notes Payable. The entry is: - Debit: Accounts Receivable \( \\(45,000 \) - Credit: Notes Payable \( \\)45,000 \).
04

Journal Entry for Payment at Maturity

At maturity, the business will pay the principal and interest. The journal entry is: - Debit: Notes Payable \( \\(45,000 \) - Debit: Interest Expense \( \\)450 \) - Credit: Cash \( \$45,450 \).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Understanding Notes Payable
Notes payable are financial obligations or promises a business makes to pay a certain amount of money at a future date. Essentially, it's a written promissory note that can serve as formal evidence of debt. Here's why they matter:

  • Formal Agreement: Unlike informal IOUs, notes payable signify a formal, binding agreement that a business will repay the specified amount.
  • Legal Enforceability: The note can be legally enforced, meaning that failure to pay can result in legal action.
  • Interest-bearing: Most notes include an interest component, providing compensation to the lender for using their funds.
When a note is issued, it creates a liability on the company's balance sheet. This is depicted as 'Notes Payable.' By issuing a note, a business agrees to pay both the principal and any accrued interest by the note's maturity date. Understanding this concept is crucial as it affects both the balance sheet and cash flows in the organization.
Effective Interest Calculation
Calculating interest on notes payable is a significant part of maintaining accurate financial records. The interest is typically calculated using a simple interest formula:\[ \text{Interest} = \text{Principal} \times \text{Rate} \times \text{Time} \]Let's break down each part:

  • Principal: This is the original amount borrowed, in our case, \( \\(45,000 \).
  • Rate: This is the annual interest rate, expressed as a decimal (for example, \(6\% = 0.06\)).
  • Time: This is the time period for which the interest is calculated, expressed in years. For a 60-day note, this time period can be represented as \( \frac{60}{365} \).
In our example, the interest is computed as approximately \( \\)442.47 \), which can be rounded to \( \$450 \) for simplicity in journal entries. Correctly calculating interest ensures that expenses and liabilities are accurately portrayed in financial documents, which is essential for financial transparency.
The Journal Entry Process
The process of journalizing transactions is how businesses maintain their financial records. For notes payable, the journal entries reflect both the creation and the settlement of debt. Here's the process:

  • Issuance of the Note: When the note is issued, it is recorded by debiting Accounts Receivable and crediting Notes Payable. The entry for our scenario: - Debit: Accounts Receivable for \(\\(45,000\) - Credit: Notes Payable for \(\\)45,000\)
  • Maturity Payment: At maturity, the business must pay both the principal and the accrued interest. This payment is recorded by debiting Notes Payable and Interest Expense, and crediting Cash. The entry: - Debit: Notes Payable for \(\\(45,000\) - Debit: Interest Expense for \(\\)450\) - Credit: Cash for \(\$45,450\)
Journal entries are the fundamental building blocks of accounting records, and they help ensure that the financial statements accurately reflect the financial position of the business. Properly executing these entries is critical for any accountant or business professional.

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Most popular questions from this chapter

U-Build It Warehouse issues a 45-day note for \(\$ 800,000\) to Thomson Home Furnishings Co. for merchandise inventory. Thomson Home Furnishings Co. discounts the note at \(7 \%\). a. Journalize U-Build It Warehouse's entries to record: 1\. the issuance of the note. 2\. the payment of the note at maturity. b. Journalize Thomson Home Furnishings Co.'s entries to record: 1 . the receipt of the note. 2\. the receipt of the payment of the note at maturity.

Thorup Company had gross wages of \(\$ 200,000\) during the week ended December 10 . The amount of wages subject to social security tax was \(\$ 180,000\), while the amount of wages subject to federal and state unemployment taxes was \(\$ 25,000\). Tax rates are as follows: \(\begin{array}{ll}\text { Social security } & 6.0 \% \\ \text { Medicare } & 1.5 \% \\ \text { State unemployment } & 5.3 \% \\ \text { Federal unemployment } & 0.8 \%\end{array}\) The total amount withheld from employee wages for federal taxes was \(\$ 40,000\). a. Journalize the entry to record the payroll for the week of December 10 . b. Journalize the entry to record the payroll tax expense incurred for the week of December \(10 .\)

A business issued a 30 -day, \(4 \%\) note for \(\$ 60,000\) to a creditor on account. Journalize the entries to record (a) the issuance of the note and (b) the payment of the note at maturity, including interest.

I-Generation Co. sold 14,000 annual subscriptions of Climber's World for \(\$ 60\) during December 2010. These new subscribers will receive monthly issues, beginning in January 2011. In addition, the business had taxable income of \(\$ 400,000\) during the first calendar quarter of 2011 . The federal tax rate is \(40 \%\). A quarterly tax payment will be made on April 7, \(2011 .\) Prepare the Current Liabilities section of the balance sheet for I-Generation Co. on March 31, \(2011 .\)

Kailua Motors is a small manufacturer of specialty electric motors. The company employs 26 production workers and 7 administrative persons. The following procedures are used to process the company's weekly payroll: a. All employees are required to record their hours worked by clocking in and out on a time clock. Employees must clock out for lunch break. Due to congestion around the time clock area at lunch time, management has not objected to having one employee clock in and out for an entire department. b. Whenever a salaried employee is terminated, Personnel authorizes Payroll to remove the employee from the payroll system. However, this procedure is not required when an hourly worker is terminated. Hourly employees only receive a paycheck if their time cards show hours worked. The computer automatically drops an employee from the payroll system when that employee has six consecutive weeks with no hours worked. c. Whenever an employee receives a pay raise, the supervisor must fill out a wage adjustment form, which is signed by the company president. This form is used to change the employee's wage rate in the payroll system. d. Kailua Motors maintains a separate checking account for payroll checks. Each week, the total net pay for all employees is transferred from the company's regular bank account to the payroll account. e. Paychecks are signed by using a check-signing machine. This machine is located in the main office so that it can be easily accessed by anyone needing a check signed. State whether each of the procedures is appropriate or inappropriate after considering the principles of internal control. If a procedure is inappropriate, describe the appropriate procedure.
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