Reference no: EM131165688

PROBLEM

Notes Payable: Accruing Interest During the fiscal year ended December 31, Swanlee Corporation engaged in the following transactions involving notes payable:

July 1 Borrowed $20,000 from Weston Bank, signing a 90-day, 12 percent note payable.

Sept. 16 Purchased office equipment from Moontime Equipment. The invoice amount was $30,000, and Moontime agreed to accept, as full payment, a 10 percent, three-month note for the invoice amount.

Oct. 1 Paid Weston Bank the note plus accrued interest.

Dec. 1 Borrowed $170,000 from Jean Jones, a major corporate stockholder. The corporation issued a $170,000, 5 percent, 120-day note payable.

Dec. 1 Purchased merchandise inventory in the amount of $10,000 from Listen Corporation. Listen accepted a 90-day, 12 percent note as a full settlement of the purchase. Swanlee Corporation uses a perpetual inventory system.

Dec. 16 The $30,000 note payable to Moontime Equipment matured today. Swanlee paid the accrued interest on this note and issued a new 60-day, 12 percent note payable in the amount of $30,000 to replace the note that matured.

Instructions

1. Prepare journal entries (in general journal form) to record the above transactions. Use a 360-day year in making the interest calculations.

2. Prepare the adjusting entry needed at December 31, prior to closing the accounts. Use one entry for all three notes (round to the nearest dollar).

3. Provide a possible explanation why the new 60-day note payable to Moontime Equipment pays 16 percent interest instead of the 10 percent rate charged on the September 16 note.