Question

Proco had an account payable of $84,000 due to one of its suppliers. The amount was due to be paid on January 31. Hillside did not have enough cash on hand then to pay the amount due, so Proco's treasurer called the supplier and agreed to sign a note payable for the amount due. The note was dated February 1, had an interest rate of 7% per annum, and was payable with interest on May 31.

Q1 What effects did the February 1 change from account payable to a note payable have on the financial statements?

Q2 What effects did the March 31 accrual of interest expense for February and March have on the financial statements?

Q3 What effects did the May 31 payment of the note and all of the interest due to the supplier have on the financial statements?

The options for all three Questions Below

a. Increase in assets and liabilities

b. Decrease in assets, decrease in liabilities

c. Decrease in assets, decrease in liabilities, decrease in stockholders equity

d. Decrease in assets, increase in liabilities, increase in stockholders equity

Answer 1

Accounts payable are recorded as current liabilities in the balance sheet when the purchase is made on credit period
Q1
On Feb 1 the change of accounts payable to note payable would
1. Decrease the accounts payable liability by $84,000 in the balance sheet
2. Increase the notes payable liability by $84,000 in the balance sheet
Q2
At the end of Mar 31, the accrued interest would be of 2 months Feb and Mar which the company would recognize
Interest payment of Feb and Mar = 84,000*7%*(2/12)					980
On Mar 31 the accural interest impact would be
1. The interest expense in the income statement would increase by $980
2. The interest payable liability would increase by $980 in the balance sheet
Increase in liabilities and decrease in stockholders equity
Q3
On May 31, company would make payment of notes payable and interest payment of total 4 months
Interest payment of Apr and May = 84,000*7%*(2/12)					$980
On May 31 the payment of notes payable and interest impact on financial statement would be
1. Cash asset of the company would reduce by $85,960 (84,000+980+980) for payment of notes payable and interest expense for 4 months
2. The notes payable liability would reduce by $84,000
3. The interest payable liability recognized on Mar 31 would reduce by $980
4. In current year company would recognize interest expense for Apr and May of $980 in the income statement
Decrease in assets, decrease in liabilities and decrease in stockholders equity