Question

Bryant Company sells a wide range of inventories, which are initially purchased on account. Occasionally, a short-term note payable is used to obtain cash for current use. The following transactions were selected from those occurring during the year.

a.	On January 10, purchased merchandise on credit for $20,000. The company uses a perpetual inventory system.
b.	On March 1, borrowed $44,000 cash from City Bank and signed a promissory note with a face amount of $44,000, due at the end of six months, accruing interest at an annual rate of 10.00 percent, payable at maturity.

Required:
1.	For each of the transactions, indicate the accounts, amounts, and effects on the accounting equation.(Enter any decreases to account balances with a minus sign.)

Answer 1

• Answer ‘a’

The journal entry for Jan 10 inventory purchased will be:

Inventory a/c debited by $20,000
Accounts payable a/c credited by $20,000

Accounts affected: Inventory and Accounts payable by $20,000

Accounting equation: Assets = Liabilities + Equity
Inventory [Assets] $20,000 = Accounts Payable [ Liabilities] $20000 + Equity [Nil]

• Answer ‘b’

Notes payable = $44000 at 10% due in 6 months on 1^st sept

Interest expenses = $44000 x 10% x 6/12 = $2,200

Entry on March 1 will be:

Cash a/c debited by $44,000
and Notes payable a/c credited by $44,000

Accounting equation: Assets = Liabilities + Equity
Cash [Assets] $44,000 = Notes Payable [ Liabilities] $44000 + Equity [Nil]

Entry on 1^st Sept on payment of note will be:

Notes payable debited by $44,000
Interest expenses debited by $2,200
and Cash a/c credited by $46,200

Accounting equation: Assets = Liabilities + Equity
Cash [Assets] $ (46,200) = Notes Payable [ Liabilities] $(44,000) + Interest expense $(2,200) [Equity-Retained Earnings]