E13-2 The following are selected 2010 transactions of Darby Corporation. Sept. 1 Oct. 1 Oct.

Purchased inventory from Orion company on account for $50,000. Darby records purchases gross and uses a perio Issued a $50,000, 12-month, 8% note to Orion in payment of account. Borrowed $75,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $81,000 note.

Instructions a. Prepare journal entries for the selected ttransactions above. The journal entries are Sep 1 Purchases Accounts Payable Oct 1 Accounts Payable Notes Payable Cash Discount on notes payable Notes Payable

50,000 50,000 50,000

In the periodic system inventory purchases are reco

50,000 The accounts payable is converted to notes payable 75,000 6,000

Oct 1

Face value is 81,000 and cash received is 75,000 so 81,000 difference is discount

b. Prepare adjusting entries at December 31. The adjusting entry would relate to accrual of interest Interest for 3 month on Orion note = 50,000 X 8% X 3/12 = Interest for 3 months bank note = 6,000 X 3/12 = The adjusting entry is Dec 31 Interest Expense 1,000 Interest Payable Dec 31 Interest Expense Discount on Notes Payable 1,500 1,500

1,000 1,500 Total interest is 6,000 which is the disco

1,000

c. Comute the total net liability to be reported on the december 31 balance sheet for: 1. the interest-bearing note. 2. the zero-interest-bearing note. 1. The net liability for interest bearing note = 50,000 principal + 1,000 interest = 51,000 2. The net liability for zero-interest bearing note = 81,000 - (6,000-1,500) = $76,500

chases gross and uses a periodic inventory system.

$81,000 note.

nventory purchases are recorded in Purchase account

s converted to notes payable

d cash received is 75,000 so

est is 6,000 which is the discount, so we calculate the amount for 3 months