1. Serene Company purchases fountains for its inventory from Kirkland Inc. The following transactions take place during the current year, using the perpetual inventory method.
2. On July 3, the company purchases thirty fountains for $1,200 per fountain, on credit. Terms of the purchase are 2/10, n/30, invoice dated July 3.
3. On August 3, Serene does not pay the amount due and renegotiates with Kirkland. Kirkland agrees to convert the debt owed into a short-term note, with an 8% annual interest rate, payable in two months from August 3.
4. On October 3, Serene Company pays its account in full.

Record the journal entries to recognize the initial purchase, the conversion, and the payment.

Solution

Jul. 3		36,000
			36,000
	To record fountain purchase, terms of purchase 2/10, n/30

Note: $1,200 30.

Aug. 3	Accounts Payable
	Short-Term Notes Payable
	To record conversion to short-term Note Payable, terms pay in two months, interest rate 8%

Oct. 3	Short-Term Notes Payable
	Interest Expense
	Cash
	To record honored short-term loan, 8% interest, payable in two months