Question

A business issued a 180-day, 7% note for $58,000 to a creditor on account. Illustrate the effects on the accounts and financial statements of recording (a) the issuance of the note and (b) the payment of the note at maturity, including interest.

If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

a. Illustrate the effects on the accounts and financial statements of recording the issuance of the note.

Statement of Cash Flows Balance Sheet Income Statement Assets = Liabilities + Stockholders' Equity No effect = No effect + No effect + No effect Statement of Cash Flows Income Statement

b. Illustrate the effects on the accounts and financial statements of recording the payment of the note at maturity, including interest. Assume a 360-day year. If required, round interest expense to the nearest whole number.

Statement of Cash Flows Balance Sheet Income Statement Assets = Liabilities + Stockholders' Equity = + Statement of Cash Flows Income Statement

Answer 1

Part 1)

Effects on accounts and financial statements:

a) We will first see the jornal entry for issuance of note:

Accounts payable --- Dr 58,000

To Note payable a/c 58,000

Thus,we can see that one current liability will reduce and other current liability will increase.

b) Now, We will see entry fro payment of note on due date:

Note Payable a/c--- Dr 58,000

Interest expense-----Dr 2,030 (assuming year of 360 days)

To cash 60,030

Now we see that current liability reduces by 58,000, interest expense will increase by 2,020 and current asset (cash) will reduce by 60,030.

Part 2)

a) on issuance of note only balance sheet will be affected and there will be no effect on income statement or cash flow statement:

Assets($)	=	Liabilities($)	+	Shareholders' Equity($)
No Effect	=	-58,000(Accounts payable) +58,000(notes payable)	+	No Effect

b) on payment of note on due date cash flow will be effected as there will be cash outflow of $60,030, Income statement will be debited by interest expense of $2,030(ultimately affecting shareholders' equity) and current libilities will reduce by $58,000.

Assets($)	=	Liabilities($)	+	Shareholders' Equity($)
-60,030(cash)	=	-58,000(notes payable)	+	-2,030(Interest Expense)

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