Answer:
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.
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.
