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

Date	Description	Debit	Credit
(a)	Recording Entries
May 10	Purchases	80,000
	Accounts payable - F Company		80,000
May 23	Accounts payable - F Company	80,000
	Cash		80,000
June 1	Equipment	150,000
	Cash		40,000
	9% Notes payable		110,000
Oct 30	Cash	270,000
	Discount on notes payable	30,000
	To Notes payable - Virginia State Bank		300,000
(b)	Adjusting Entries
Dec 31	Interest expense (110,000*9%*7/12)	5,775
	Interest payable		5,775
Dec 31	Interest expense (30,000*2/12)	5,000
	Discount on notes payable		5,000

(c) Balance Sheet (partial)

Current Liabilities:
Interest payable		5,775
9% Notes payable - R Company		110,000
Notes payable - Virginia State Bank	300,000
Less: Discount on notes payable (30,000-5,000)	(25,000)	275,000
Total current liabilities		390,775