Question

The following items were selected from among the transactions completed by O’Donnel Co. during the current year:

Jan. 10. Purchased merchandise on account from Laine Co., $144,000, terms n/30.
Feb. 9. Issued a 30-day, 8% note for $144,000 to Laine Co., on account.
Mar. 11. Paid Laine Co. the amount owed on the note of February 9.
May 1. Borrowed $174,000 from Tabata Bank, issuing a 45-day, 9% note.
June 1. Purchased tools by issuing a $120,000, 60-day note to Gibala Co., which discounted the note at the rate of 6%.
15. Paid Tabata Bank the interest due on the note of May 1 and renewed the loan by issuing a new 45-day, 7% note for $174,000. (Journalize both the debit and credit to the notes payable account.)
July 30. Paid Tabata Bank the amount due on the note of June 15.
30. Paid Gibala Co. the amount due on the note of June 1.
Dec. 1. Purchased office equipment from Warick Co. for $120,000, paying $20,000 and issuing a series of ten 5% notes for $10,000 each, coming due at 30-day intervals.
15. Settled a product liability lawsuit with a customer for $77,000, payable in January. O’Donnel accrued the loss in a litigation claims payable account.
31. Paid the amount due Warick Co. on the first note in the series issued on December 1.
Required:
a. Jornalize the above transactions.

Answer 1

O’Donnel Co.

a) Journal Entries:

Jan. 10:

Debit Purchases with $144,000

Credit Accounts Payable (Laine Co.) with $144,000

To record purchase of merchandise on account, terms n/30.

Feb. 9:

Debit Accounts Payable (Laine Co.) with $144,000

Credit Notes Payable (Laine Co.) with $144,000

To record issue of a 30-day, 8% note.

Mar. 11:

Debit Notes Payable with $144,000

Credit Cash Account with $144,000

To record payment of the note

May 1:

Debit Cash Account with $174,000

Credit Notes Payable (Tabata Bank) with $174,000

To record issue of a 45-day, 9% note.

June 1:

Debit Equipment (Tools) with $120,000

Credit Notes Payable (Gibala Co.) with $120,000

To record purchase of tools with a 60-day note, 6%.

June 15:

Debit Interest Expense with $15,660

Credit Cash Account with $15,660

To record payment of interest, 9% on $174,000 note.

June 15:

Debit Notes Payable with $174,000

Credit Notes Payable (Tabata Bank) with $174,000

To record issue of 45-day, 7% note.

July 30:

Debit Notes Payable with $174,000

Debit Interest on Notes with $12,180

Credit Cash Account with $186,180

To record payment of note with 7% interest.

July 30:

Debit Notes Payable with $120,000

Debit Interest on Notes with $3,600

Credit Cash Account with $123,600

To record payment of note with 6% interest for 1 month.

Dec. 1:

Debit Office Equipment with $120,000

Credit Cash with $20,000

Credit Notes Payable (Warick Co.) with $100,000

To record purchase and issue of a series of ten 5% notes for $10,000 each, coming due at 30-day intervals.

Dec. 15:

Debit Litigation Claims Loss with $77,000

Credit Litigation Claims Payable with $77,000

To record a product liability claim.

Dec. 31:

Debit Notes Payable with $10,000

Debit Interest on Notes with $500

Credit Cash Account with $10,500

To record payment of note and interest.

Step-by-step explanation:

Notes Payable refer to the formalization of business transactions done on account with notes. This enables the creditor to enforce legal claims and receive agreed interest.

It reduces the risk of credit default for goods purchased on credit. In addition, the recipient is entitled to agreed interest which accrues thereon.

It eliminates Accounts Payable when a note is drawn and transfers the amount due to the Notes Payable. It is also a means of extending the credit period beyond the normal trade terms.