Question

Templeton Graphics, Inc. purchased production materials on October 1 of the current year using a trade note payable for $10,000. The four-month note is due on February 1 of the following fiscal year. The short-term note carries a 6% annual interest rate. Templeton's fiscal year end is December 31.

Required: Prepare the journal entries required to record the notes payable transaction for both the current and the following year.

Answer 1

To record the notes payable transaction for Templeton Graphics, Inc., two journal entries are required: one for the current year and one for the following year.

Step-by-step explanation:

To record the notes payable transaction for Templeton Graphics, Inc., two journal entries are required: one for the current year and one for the following year.

In the current year, the journal entry would be:

Debit: Production Materials Inventory $10,000
Credit: Trade Notes Payable $10,000

In the following year, when the note becomes due, the journal entry would be:

Debit: Trade Notes Payable $10,000
Debit: Interest Expense ($10,000 x 6% x 1/12) $50
Credit: Cash $10,050

In the above entries, the production materials are recorded as an inventory asset in the current year. The trade note payable and interest expense are recorded when the note is due, and the cash payment is made.