Question

On December 1, 2016, Insto Photo Company purchased merchandise, invoice price $25,000, and issued a 12%, 120-day note to Ringo Chemicals Company. Insto uses the calendar year as its fiscal year and uses the perpetual inventory system.

Answer 1

See explanation section

Step-by-step explanation:

Requirement A

Insto Photo Company

Journal Entries

Date Accounts Name Debit Credit

December 1, 2016 Inventory $25,000

Notes payable $25,000

Note: As the merchandise company issued a note for the credit purchase of merchandise inventory, notes payable is used instead of accounts payable.

Dec. 31, 2016 Interest expense $250

Interest payable $250

Note: Adjusting entry is needed as the fiscal year is ended on 31st December, therefore, there will be an accrued interest expense to be paid for one month. The calculation of interest expense = $25,000 × 12% × (30 ÷ 360) [assuming 1 year = 360 days, 1 month = 30 days]. = $250 for one month's accrual.

Requirement B

March 31, 2017 Interest expense $ 750

Interest payable $ 250

Notes payable $25,000

Cash $26,000

Note: At the end of the maturity date, the buyer will pay all the bills of the notes plus interest. Interest payable becomes debit as it did not pay by the buyer on 31st December, 2016. The remaining interest = $25,000 × 12% × (90 ÷ 360) = $750. Total cash will be paid after the maturity = $25,000 + $250 + $750 = $26,000.