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The following are selected transactions of Graves Company. Graves prepares financial statements...

Question:

The following are selected transactions of Graves Company. Graves prepares financial statements quarterly.

Jan. 2 Purchased merchandise on account from Ally Company, $35,175, terms 2/10, n/30. (Graves uses the perpetual inventory system.)
Feb. 1 Issued a 6%, 2-month, $35,175 note to Ally in payment of account.
Mar. 31 Accrued interest for 2 months on Ally note.
Apr. 1 Paid face value and interest on Ally note.
July 1 Purchased equipment from Clark Equipment paying $10,560 in cash and signing a 7%, 3-month, $43,840 note.
Sept. 30 Accrued interest for 3 months on Clark note.
Oct. 1 Paid face value and interest on Clark note.
Dec. 1 Borrowed $18,000 from the Jonas Bank by issuing a 3-month, 6% note with a face value of $18,000.
Dec. 31 Recognized interest expense for 1 month on Jonas Bank note.
                                                                                                                                                       

Prepare journal entries for the listed transactions and events. (Round answers to 0 decimal places, e.g. 125.)

Post to the accounts Notes Payable, Interest Payable, and Interest Expense. (Post entries in the order of journal entries in the previous question.) Show the balance sheet presentation of notes and interest payable at December 31.

Graves Company
Balance Sheet
December 31                                                                        
$
$

What is the total interest expense for the year?

Total interest $          

Interest Expense:

Interest expense is a non-operating related expense treated as deduction from income on the income statement. It is the interest payable on any borrowings.

Answer and Explanation:


Journal Entries


Jan 2 Merchandise Inventory 35,175
Accounts Payable 35,175
Feb 1 Accounts Payable 35,175
Notes Payable 35,175
Mar 31 Interest Expense ($35,175 x 6% x 2/12) 351.75
Interest Payable 351.75
Apr 1 Notes Payable 35,175
Interest Payable 351.75
Cash 35,526.75
Jul 1 Equipment 54,400
Cash 10,560
Notes Payable 43,840
Sept 30 Interest Expense (43,840 x 7% x 3/12) 767.20
Interest Payable 767.20
Oct 1 Notes Payable 43,840
Interest Payable 767.20
Cash 44,607.20
Dec 1 Cash 18,000
Notes Payable 18,000
Dec 31 Interest Expense 90
Interest Payable 90

BALANCE SHEET

Graves Company
Balance Sheet
December 31
Interest Payable $90
Notes Payable 18,000
Total Liabilities $18,090


The total interest expense is then $351.75 + $767.20 + $90 = $1,208.95.


Learn more about this topic:

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How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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