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The following problems present situations involving both deferrals and accruals. Drawing a time line of the underlying economic events and cash transactions and dividing
The following problems present situations involving both deferrals and accruals. Drawing a time line of the underlying economic events and cash transactions and dividing the time line into the relevant accounting periods often helps when analyzing situations where cash moves in an accounting period before or after from the underlying economic event. Problem 1.6A. Andrew Company borrowed $50,000 from Bradford, Inc. at twelve percent annual interest on January 1. Twelve percent annual interest on a $50,000 loan translates to $6,000 in interest per year, or $500 in interest each month. The promissory note requires Andrew Company to pay the $500 monthly interest on, or before, the last day of each month. Andrew Company made three interest payments, $600 on January 15, $250 on February 20, and $350 on March 10. (1) Prepare appropriate journal entries for Andrew Company for the months of January, February and March, assuming each month is a separate accounting period. (2) Prepare appropriate journal entries for Bradford, Inc. for the months of January, February and March, assuming each month is a separate accounting period. Problem 1.6B. Jones Company leased a machine from Smith, Inc. on January 1. Under the terms of the lease, Jones Company agreed to pay $250 rent per month, due on the first day of each month. Jones Company made two rental payments, one of $300 on January 1 and the other of $350 on February 14. (1) Prepare appropriate journal entries for Jones Company for the months of January, February, and March, assuming each month is a separate accounting period. (2) Prepare appropriate journal entries for Smith, Inc. for the months of January, February, and March, assuming each month is a separate accounting period.
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