Mastery Problem

Instructions

Chart of Accounts

General Journal

X

Instructions

Eddie Edwards and Phil Bell own and operate The Second Hand Equipment Shop. The following transactions involving notes and interest were completed during the last three months of 20--:

Oct.	1	Issued a $6,800, 60-day, 5% note to Mac Farm Equipment for purchase of merchandise.
	15	Received a $2,000, 60-day, 6% note from R. Chambers in payment for sale of merchandise.
Nov.	1	Discounted the note received from R. Chambers on October 15 at Merchants National Bank. The discount rate is 7%.
	1	Borrowed $5,000 from First National Bank on a three-month, non-interest-bearing note that was discounted at 6%.
	20	Received a $4,000, 90-day, 6.5% note from L. Revsine in payment of an account receivable.
	30	Issued a check to Mac Farm Equipment in payment of the note issued on October 1, including interest.
Dec.	10	Issued a $3,000, 90-day, 6% note to Remak Tractors to extend time for payment of an account payable.
	16	Received notification from Merchants National Bank that R. Chambers has dishonored his note. A check is issued to cover the note plus a $20 bank fee that must be paid to the bank.

Required:

1.	Prepare general journal entries for the transactions.
2.	Prepare necessary adjusting entries for the notes outstanding on December 31.

X

General Journal

Shaded cells have feedback.

	1. Prepare general journal entries for the transactions.
	2. Prepare necessary adjusting entries for the notes outstanding on December 31.
	Assume a 360 day year for interest calculations

GENERAL JOURNAL

STEP 1	Compute the maturity value of the note.
STEP 2	Compute the discount amount.
STEP 3	Compute the proceeds.

When making a loan, banks often deduct interest in advance, using a procedure known as discounting. Three steps are used to calculate the discount and proceeds.

If the maker of a note is unable to pay the amount due at maturity, the payee may allow the maker to renew all or part of the note, as in the June 1 transaction.

For notes that are signed in one period and due in the following period, however, accrued interest must be recorded at the end of the period.