Question

Exercise 13-02 The following are selected 2020 transactions of Sandhill Corporation.

Answer 1

Explanation:

a. The journal entries are as follows:

1. Purchase A/c Dr $52,000

     To Account payable A/c $52,000

(Being the purchase of inventory is recorded)

2. Account payable A/c $52,000

           To Notes payable A/c

(Being the payment is done via note payable)

3. Cash A/c Dr $52,000

Discount on Note payable A/c Dr $4,400

       To Note payable A/c $56,400

(Being the borrowed amount is recorded)

b.

Interest expense A/c Dr $1,040

      To Interest payable A/c $1,040

(Being the interest expense is recorded)

The computation is shown below:

= $52,000 × 8% × 3 months ÷ 12 months

= $1,040

Interest expense A/c Dr $1,040      ($4,160 × 3 months ÷ 12 months)

     To Discount on notes payable A/c $1,040

(Being the interest expense is recorded)

c. Now the total net liability is

i. For the interest-bearing note

= Note payable + interest payable

= $52,000 + $1,040

= $53,040

ii. For zero-interest-bearing note

= $56,400 - $3,120      ($4,160 - 1,040)

= $53,280