Question

The following are selected 2017 transactions of Blue Corporation.

Sept. 1 Purchased inventory from Encino Company on account for $65,800. Blue records purchases gross and uses a periodic inventory system.
Oct. 1 Issued a $65,800, 12-month, 7% note to Encino in payment of account. This means Blue turned the A/P balance into a Note Payable.

Required:
a. Prepare the necessary journal entries
b. Prepare adjusting entries at December 31.
c. c. Compute the total net liability.

Answer 1

Blue Corporation

a. Journal Entries:

Sept. 1 Debit Purchases $65,800

Credit Accounts payable (Encino Company) $65,800

To record the purchase of goods on account.

Oct. 1 Debit Accounts payable (Encino Company) $65,800

Credit 7% Note payable (Encino Company) $65,800

To record the issue of a 12-month note payable.

b. Adjusting Journal Entry:

Dec. 31: Debit Interest expense $1,151.50

Credit Interest payable $1,151.50

To record interest expense for the quarter.

c. Total net liability:

7% Note payable (Encino Company) $65,800

Interest payable $1,151.50

Total net liability $66,951.50

Step-by-step explanation:

a) Data and Analysis:

Sept. 1 Purchases $65,800 Accounts payable (Encino Company) $65,800

Oct. 1 Accounts payable (Encino Company) $65,800 7% Note payable (Encino Company) $65,800

Dec. 31: Interest expense $1,151.50 Interest payable $1,151.50