Question

Described below are certain transactions of Stellar Corporation. The company uses the periodic inventory system.

1.		On February 2, the corporation purchased goods from Martin Company for $75,800 subject to cash discount terms of 2/10, n/30. Purchases and accounts payable are recorded by the corporation at net amounts after cash discounts. The invoice was paid on February 26.
2.		On April 1, the corporation bought a truck for $50,000 from General Motors Company, paying $5,000 in cash and signing a one-year, 10% note for the balance of the purchase price.
3.		On May 1, the corporation borrowed $86,600 from Chicago National Bank by signing a $96,200 zero-interest-bearing note due one year from May 1.
4.		On August 1, the board of directors declared a $324,900 cash dividend that was payable on September 10 to stockholders of record on August 31.

Make all the journal entries necessary to record the transactions above using appropriate dates.

Stellar Corporation’s year-end is December 31. Assuming that no adjusting entries relative to the transactions above have been recorded, prepare any adjusting journal entries concerning interest that are necessary to present fair financial statements at December 31. Assume straight-line amortization of discounts.

Answer 1

Stellar Corporation Journal entry Date Particulars Feb-02 Purchase A/c Dr. To Accounts payable A/C Cr.($) Dr.($) 75,800 75,800 75,800 Feb-26 Accounts payable A/c Dr. To Cash A/C 75,800 50,000 Apr-01 Truck A/c Dr. To Cash A/C To 10% Notes payable A/C 5,000 45,000 May-01 Cash A/c Dr. Discount on Notes Payable A/C To Notes Payable A/C 86,600 9,600 96,200 324,900 Aug-31 Retained Earnings A/c Dr. To Dividend Payable A/C 324,900 324,900 Sep-10 Cash Dividend Payable A/C To Cash A/C 324,900 3,375 Dec-31 Interest expense A/c Dr. To Interest payable A/c 3,375 6,400 Dec-31 Interest expense A/c Dr. To Discount on Notes Payable A/C 6,400 75,800 Dec-31 Inventory A/C To Purchases A/C 75,800

Working Notes: Interest : 10% Notes payable 10% * 45000 for 9 months = 3375 Amortisation of discount on notes payable Discount = 96200-86600 = 9600 Amortisation 9600/12 = 800 per month for 8 months 800*8 = 6400