Answer:
a.
1 March 2019 Purchases $87000 Dr
Notes payable $87000 Cr
b.
31 September 2019 Interest expense $5075 Dr
Interest Payable $5075 Cr
Explanation:
a.
The purchase of inventory against notes payable will increase asset-inventory and will be recorded as a debit to purchases. The credit side of the inventory will be a current liability of notes payable for the amount of purchases.
b.
The note is a 9 month note and the interest will be paid at maturity on 30 November 2019. Following the accrual principle, the note accrues interest over its 9 months period equally. So, on 31 September, the interest on note for 7 months will be accrued.
Interest for 7 months = 87000 * 0.1 * 7/12 = $5075
This will be recorded as an expense and a liability as it is unpaid.
Answer:
(a)
March 1, 2019
Dr. Purchases / Purchases $87,000
Cr. Note payable $87,000
(b)
September 31, 2019
Dr. Interest Expense $5,075
Cr. Interest Payable on Note $5,075
Explanation:
(a)
The purchases are made against the issuance of the note. The note is a liability for the business. As Inventory is received against the liability, so to increase the Inventory balance, we debited the purchases / Inventory account because it is an asset and has debit nature.
(b)
Only 7 month's interest is accrued on September 30, 2019. Expense is charged against a liability of Interest payable on note which is credited..
Interest on Note = $87,000 x 10% x 7/12 = $5,075
