Question

Hi! Please EXPLAIN the below PROBLEMS

THANKS!

*105.    The Supplies account had a balance at the beginning of year 3 of $8,000 (before the reversing entry). Payments for purchases of supplies during year 3 amounted to $50,000 and were recorded as an expense. A physical count at the end of year 3 revealed supplies costing $11,500 was on hand. Reversing entries are used by this company. The required adjusting entry at the end of year 3 will include a debit to:

            a.   Supplies Expense for $3,500.

            b.   Supplies for $3,500.

            c.   Supplies Expense for $46,500.

            d.   Supplies for $11,500. (correct answer: $11,500 + $8,000 – $8,000 = $11,500.)

113. On June 1, 2014, Nott Corp. loaned Horn $800,000 on a 12% note, payable in five annual installments of $160,000 beginning January 2, 2015. In connection with this loan, Horn was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Horn after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2014. Horn made timely payments through November 1, 2014. On January 2, 2015, Nott received payment of the first principal installment plus all interest due. At December 31, 2014, Nott's interest receivable on the loan to Horn should be

            a.   $0.

            b.   $8,000.

            c.   $16,000. (This is correct answer $800,000 × 12% × 2/12 = $16,000.)

            d.   $24,000.

Answer 1

Answers

• All working forms part of the answer
• Question #105

--As far as my concepts understanding is concerned, the correct answer should be Option ‘B’ a debit to Supplies for $ 3,500

Let me clarify why’s that so:

--Beginning balance of Supplies was $ 8,000 [Hence Supplies has beginning balance of $ 8000 DEBIT]
--Ending balance of Supplies as per physical count is $ 11,500. This means that Supplies balance at the end of period must be equal to $ 11,500 DEBIT, while its actually is $ 8,000 Debit only [that is, it is short by $ 3,500].
--Adjusting entry would hence include a debit of $ 3,500 [11500 – 8000] to Supplies and Credit of $ 3,500 to Supplies expenses.
--That’s why Supplies would be debited by $ 3500 [Option ‘B’]
--Option ‘D’ is INCORRECT.

• Question #113

--The given answer Option ‘C’ $ 16,000 is correct.
--This is because the question asks for balance in ‘Interest receivables’ on 31 Dec 2014.

--Interest receivables = Interest earned BUT not received or Interest earned – Interest received.
--Interest earned is from Jul 1, 2014 to 31 Dec 2014
--BUT Interest received is till Nov 1, 2014.
--This means that 2 months Interest [November and December] is earned BUT not yet received.
--Hence, 2 months interest = $ 800,000 x 12% x (2months/12months) = $ 16,000
--Correct answer is therefore $ 16,000 Option C