Question

Described below are certain transactions of L Company for 2021:

1. On May 10, the company purchased goods from F Company for $80,000, terms 3/10, n/30. The invoice was paid on May 23.

2. On June 1, the company purchased equipment for $150,000 from R Company, paying $40,000 in cash and giving a one-year, 9% note for the balance.

3. On October 30, the company discounted at 11% its $300,000, one-year zero-interest-bearing note at Virginia State Bank, receiving $270,000.

Instructions

(a) Prepare the journal entries necessary to record the transactions above using appropriate dates.

(b) Prepare the adjusting entries necessary at December 31, 2021 in order to properly report interest expense related to the above transactions. Assume straight-line amortization of discounts.

(c) Indicate the manner in which the above transactions should be reflected in the Current Liabilities section of Lamar Company's December 31, 2021 balance sheet.

Answer 1

(a) May 10 Purchase DR $80,000

To F Company $80,000

(Being purchase made on credit)

May 23 F Company Dr $80,000

To Cash $80,000

(Being credit purchase paid)

June 1 Purchase $150000

To Cash $40000

To 9% Note $110000

( being purchase made fomr R ltd and payment made partly in cash & and note )

October 30      Bank 270000

Discount on discounting of bill A/c 30000

To 1Yr Zero interest note A/c 300000   

(being bill discounted and money recived)

(b) 31st Dec 2021 Interest Exp Dr A/c 5775

To 9% Note A/c 5775

(being interest exp booked) ($110000*9%*7/12)

31st Dec 2021   Discount Exp A/c 5000

  To Discount on discounting of bill A/c 5000

( 30000/12*2) (Being discount amortised)

(c) Current Liabilities :

  F Company should be shown in the Trade Payables part.

9% Notes & Discount on discounting of bill A/c will be shown in Other Current Liabilities.