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4 July, 14:52

On March 1, 2019 , Jasper Company purchased inventory costing $87,000 by signing a 10 %, nine-month, short-term note payable. Jasper will pay the entire note (principal and interest) on the note's maturity date. Journalize the company's (a) purchase of inventory; and (b) accrual of interest on the note payable on September 31, 2019.

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  1. 4 July, 15:02
    0
    (a)

    March 1, 2019

    Dr. Purchases / Purchases $87,000

    Cr. Note payable $87,000

    (b)

    September 31, 2019

    Dr. Interest Expense $5,075

    Cr. Interest Payable on Note $5,075

    Explanation:

    (a)

    The purchases are made against the issuance of the note. The note is a liability for the business. As Inventory is received against the liability, so to increase the Inventory balance, we debited the purchases / Inventory account because it is an asset and has debit nature.

    (b)

    Only 7 month's interest is accrued on September 30, 2019. Expense is charged against a liability of Interest payable on note which is credited ...

    Interest on Note = $87,000 x 10% x 7/12 = $5,075
  2. 4 July, 15:19
    0
    a.

    1 March 2019 Purchases $87000 Dr

    Notes payable $87000 Cr

    b.

    31 September 2019 Interest expense $5075 Dr

    Interest Payable $5075 Cr

    Explanation:

    a.

    The purchase of inventory against notes payable will increase asset-inventory and will be recorded as a debit to purchases. The credit side of the inventory will be a current liability of notes payable for the amount of purchases.

    b.

    The note is a 9 month note and the interest will be paid at maturity on 30 November 2019. Following the accrual principle, the note accrues interest over its 9 months period equally. So, on 31 September, the interest on note for 7 months will be accrued.

    Interest for 7 months = 87000 * 0.1 * 7/12 = $5075

    This will be recorded as an expense and a liability as it is unpaid.
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