Question

P10.4B: MileHi Mountain Bikes markets mountain-bike tours to clients vacationing in various locations in the mountains of British Columbia. The current liabilities section of the October 31, 2020, balance sheet included notes payable of $15,000 and interest payable of $375 related to a six-month, 6% note payable to Eifert Company on December 1, 2020.

During the year ended October 31, 2021, MileHi had the following transactions related to notes payable:

2020
Dec.    1		Paid the $15,000 Eifert note, plus interest.
2021
Apr.    1		Issued a $75,000, nine-month, 7% note to Mountain Real Estate for the purchase of additional mountain property on which to build bike trails. Interest is payable quarterly on July 1, October 1, and at maturity on January 1, 2022.
30		Purchased Mongoose bikes to use as rentals for $8,000, terms n/30.
May  31		Issued Mongoose an $8,000, three-month, 8% note payable in settlement of its account (see April 30 transaction). Interest is payable at maturity.
July    1		Paid interest on the Mountain Real Estate note (see April 1 transaction).
Aug.  31		Paid the Mongoose note, plus interest (see May 31 transaction).
Oct.    1		Paid interest on the Mountain Real Estate note (see April 1 transaction).
1		Borrowed $90,000 cash from Western Bank by issuing a five-year, 6% note. Interest is payable monthly on the first of the month. Principal payments of $18,000 must be made on the anniversary of the note each year.

Instructions

1. Record the transactions and any adjustments required at October 31, 2021.

2. Show the balance sheet presentation of notes payable and interest payable at October 31, 2021.

3. Show the income statement presentation of interest expense for the year.

Taking It Further  Why is it important to correctly classify notes payable as either current or non-current in the balance sheet?

Answer 1

Answer :

1 Journal Entries

2 working Notes

3 Statement of Financial Position / Balance Sheet (extract)

4 Income Statement (extract)

Important to classify : Notes Payable are classified as Current or Non current because

1 According to the accounting standards it is necessary to classify the assets and liabilities as current or non current in the balance sheet.

2 Management requires information at regular intervals for requirement of funds for payment of Notes Payable so that funds can be arranged at the appropriate time.

3 This classification helps to analyse the short term and long run solvency position of the organisation.