Question

Accounts and Notes Payable.
Described below are certain transactions of Lamar Company for 2018:
1. On May 10, the company purchased goods from Fox Company for $75,000, terms 2/10, n/30. Purchases and accounts payable are recorded at net amounts. The invoice was paid on May 18.
2. On June 1, the company purchased equipment for $150,000 from Rao Company, paying $50,000 in cash and giving a one-year, 9% note for the balance.
3. On September 30, the company discounted at 10% its $300,000, one-year zero-interest-bearing note at Virginia State Bank.

Instructions
(a) Prepare the journal entries necessary to record the transactions above using appropriate dates.
(b) Prepare the adjusting entries necessary at December 31, 2018 in order to properly report interest expense related to the above transactions. Assume straight-line amortization of discounts.
(c) Indicate the manner in which the above transactions should be reflected in the Current Liabilities section of Lamar Company's December 31, 2018 balance sheet.

Answer 1

Solution:-

(a) Prepare the journal entries necessary to record the transactions above using appropriate dates:-

Date	Account titles	Debit	Credit
May 10,2018	Purchase / Inventory	73,500
	Accounts payable		73,500
May 18, 2018	Accounts Payable	73,500
	Cash		73,500
June 1, 2018	Equipment	150,000
	Cash		50,000
	Notes payable		100,000
September 30, 2018	Cash	270,000
	Discount on Notes Payable	30,000
	Notes payable		300,000

(b) Prepare the adjusting entries necessary at December 31, 2018 in order to properly report interest expense related to the above transactions. Assume straight-line amortization of discounts:-

Account titles	Debit	Credit
Interest Expense	5,250
Interest Payable ($100,000 × .09 × 7/12)		5,250
Interest Expense	7,500
Discount on Notes Payable ($30,000 × 3/12)		7,500

(c) Indicate the manner in which the above transactions should be reflected in the Current Liabilities section of Lamar Company's December 31, 2018 balance sheet:-

Current Liabilities
Interest payable		5,250
Note payable—Rao Company		100,000
Note payable—Virginia State Bank	300,000
Less: Discount on note	22,500	277,500
		382,750