Question

On March 1, 2019​, Jasper Company purchased inventory costing $87,000 by signing a 10​%, ​nine-month, short-term note payable. Jasper will pay the entire note​ (principal and​ interest) on the​ note's maturity date. Journalize the​ company's (a) purchase of​ inventory; and​ (b) accrual of interest on the note payable on September 31, 2019.

Answer 1

Answer:

a.

1 March 2019 Purchases                                  $87000 Dr

                              Notes payable                             $87000 Cr

b.

31 September 2019  Interest expense                       $5075 Dr

                                       Interest Payable                             $5075 Cr

Explanation:

a.

The purchase of inventory against notes payable will increase asset-inventory and will be recorded as a debit to purchases. The credit side of the inventory will be a current liability of notes payable for the amount of purchases.

b.

The note is a 9 month note and the interest will be paid at maturity on 30 November 2019. Following the accrual principle, the note accrues interest over its 9 months period equally. So, on 31 September, the interest on note for 7 months will be accrued.

Interest for 7 months = 87000 * 0.1 * 7/12 = $5075

This will be recorded as an expense and a liability as it is unpaid.

Answer 2

Answer:

(a)

March 1, 2019

Dr. Purchases / Purchases     $87,000

Cr. Note payable                     $87,000

(b)

September 31, 2019

Dr. Interest Expense              $5,075

Cr. Interest Payable on Note $5,075

Explanation:

(a)

The purchases are made against the issuance of the note. The note is a liability for the business. As Inventory is received against the liability, so to increase the Inventory balance, we debited the purchases / Inventory account because it is an asset and has debit nature.

(b)

Only 7 month's interest is accrued on September 30, 2019. Expense is charged against a liability of Interest payable on note which is credited..

Interest on Note = $87,000 x 10% x 7/12 = $5,075