Journal

DATE 20X7 Mar. 31 Inventory Note Payable, Short-Term Purchased inventory by issuing a note payable Dec. 31 Interest Expense ($10,000 × .10 × 9/12) Interest Payable (Accrued interest expense) 20X8 Mar. 31 Note Payable, Short-Term Interest Payable Interest Expense ($10,000 × .10 × 3/12) Cash (Paid note payable and interest at maturity) 10,000 750 250 11,000 750 750 10,000 10,000 ACCOUNTS DEBIT CREDIT

S8-2 1. ASSETS Balance Sheet December 31, 20X7 LIABILITIES Current liabilities: Note payable, short-term Interest payable($10,000 × .10 × 9/12) $10,000 750

Income Statement Year Ended December 31, 20X7 Revenues Expenses Interest expense ($10,000 × .10 × 9/12) $750

000 12.000) Sales Revenue to record sales on account DEBIT 50.000 CREDIT Warranty Expense ($500. The 20X8 income statement will report: Interest expense ($10.000 Balance 10.000 13. 12.03) Estimated Warranty Payable to accrue warranty expense 15.000 Estimated Warranty Payable Balance 12.000 × .000 15.2. Journal DATE ACCOUNTS Cash ($500.000 $50.000 .000 450.10 × 3/12) $250 S8-3 1.000 500.000 × .10) Notes Receivable ($500.000 Estimated Warranty Payable Cash To pay warranty claims 2.000 15.000 × .

000 × 1.000 The matching principle addresses this situation. Premium . S8-5 1. if a Harley- Outside the United States. was not liable for any of these product losses. regardless of when the company pays for warranty claims. Cash payments for warranties do not determine the amount of warranty expense for that year. 3. Harley-Davidson must pay only for losses above $25 million because the company is insured against losses up to $25 million.000 X. S8-6 a.S8-4 Warranty expense ($500.975) d. Par (face) value c. $897. the contingency can become a real liability if the user of a Harley-Davidson product suffers a loss for which the company is responsible. In the United States. Discount b. $410.03) = $15.10375) c.000 × 1. the contingency becomes a real liability the same way Davidson user suffers a loss for which the company is responsible. These are contingent liabilities because at the time of the note Harley-Davidson.8975) b.500 ($ 400.. Outside the United States. 2. The warranty expense for the year does not necessarily equal the year s cash payments for warranties. The company is insured against losses between $3 million and $25 million.000 × . $ 97.500 ($ 100.000 × . Harley-Davidson must pay for all losses up to $3 million and all losses above $25 million.02625) S8-7 a. The matching principle demands that the company record the warranty expense in the same period that the business records sales revenue. Inc. $551.875 ($ 500.500 ($1.000.

Acct.151 $11.849 $88.915 $3. Discount S8-8 Journal DATE 2000 July 1 ACCOUNTS Cash Bonds Payable to issue bond at par.000 5.500 $3. c. preceding bond ( B .000 163 163 163 163 DEBIT 5. amt. 20X8 July 31 Jan.A) (preceding ($500. 31. 2000 Dec. Bond Carrying (4 1/2% of Amortization bal.065 × 6/12) Interest Payable to accrue interest expense.000 $12.500 $3.585 $12. Dis. 20X9 July 31 Interest Exp.000 × . 1 Interest Payable Cash to pay semiannual interest on bonds. 31. Dis. d.000 5.953 $415 $434 $453 . 2010.000 CREDIT S8-9 1. (3 1/2% of maturity Value) B C D E Semiannual Interest Date Jan.000 $87.d. D C) $13. Jan. July 1 Bonds Payable Cash to pay bonds at maturity 5. 2001.000 D) carrying amt. b.500 $3.698 $87. Amortization table A Interest Pay.302 $3. 31 Interest Expense ($5.415 $87.934 $3.

000 × .915 415 3.000 3.$4. $4. 20X8 $3. Pay cash interest of $13.700 10 X 6 12 . 31 ACCOUNTS Cash ($100.934 Interest expense increases because the bond carrying amount increases as the bonds move toward maturity.065 × 6/12) 4.50 $162.50 ($5.000 . 2010 3. 20X9 $3.700 ($5.50 + $5. 3.000 CREDIT 100.500 each six months. Interest expense: July 31.000 on July 1. Journal DATE 20X8. $177. 31.915 Jan.87) Discount on Bonds Payable Bonds Payable July 31 Interest Expense Discount on Bonds Payable Cash DEBIT 87.000 Pay back $100. $162.000 13. Jan.000 × . $5. S8-11 1.2.000 × . An increasing bond carrying amount produces an increasing amount of interest expense each period.500 S8-10 1.000 at maturity 2. Borrowed $87.94) 2.

000 × .000 × . Jan.90) Discount on Bonds Payable Bonds Payable to issue bonds at a discount.S8-12 Journal DATE a.065 × 6/12) To accrue interest and amortize bonds. 2001.000 188 25 163 CREDIT b. July 1 ACCOUNTS Cash ($5.500 500 5. Dec. Interest Payable Cash to pay semi-annual interest DEBIT 4. 2000. 1 163 163 . 31 c. Interest Expense Discount on Bonds Payable ($500 / 10 × 6/12) Interest Payable ($5. 2000.

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