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Ermlar Corporation sells rock-climbing products and also operates an indoor climbing facility for...

Question:

Ermlar Corporation sells rock-climbing products and also operates an indoor climbing facility for climbing enthusiasts. During the last part of 2014, Ermlar had the following transactions related to notes payable.

Sept. 1 Issued a $12,000 note to Lippert to purchase inventory. The 3-month note payable bears interest of 6% and is due December 1. (Ermlar uses a perpetual inventory system.)

Sept.30 Recorded accrued interest for the Lippert note.

Oct. 1 Issued a $16,500, 8%, 4-month note to Shanee Bank to finance the purchase of a new climbing wall for advanced climbers. The note is due February 1.

Oct. 31 Recorded accrued interest for the Lippert note and the Shanee Bank note.

Nov. 1 Issued a $26,000 note and paid $8,000 cash to purchase a vehicle to transport clients to nearby climbing sites as part of a new series of climbing classes. This note bears interest of 6% and matures in 12 months.

Nov. 30 Recorded accrued interest for the Lippert note, the Shanee Bank note, and the vehicle note.

Dec. 1 Paid principal and interest on the Lippert note.

Dec. 31 Recorded accrued interest for the Shanee Bank note and the vehicle note.

Required:

1. Show the balance sheet presentation of notes payable and interest payable at December 31. Post the above entries to the Notes Payable, Interest Payable, and Interest Expense accounts.

Accounting for Notes Payables

Notes or Promissory notes are monetary instrument issued in lieu of any payment, whereby the issuer promises to pay the amount at a fututre date along with an interest on the same. It depicts the amount, interest rate and term of the loan. Accounting for notes payable involves:

  • Recording the note payable as liabilities on date of issue.
  • Recording repayment of loan on date of payment.
  • Recording accrual of interest as expense.
  • Recording accrued interest payable as liability at year end.

Even though the interest is payable at the end of the term of note, if the term covers more than one financial year, an adjustment entry is required to be passed to record and report the interest accrued as on the date of balance sheet.

Answer and Explanation: 1

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Ermlar Corporation
Balance Sheet for the year ended Dec 31, 2014 (extract)
Equity and...

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Accounting for Non-Interest & Interest-Bearing Notes

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Chapter 4 / Lesson 7
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Discover how to account for both non-interest and interest-bearing notes. Examine a dilemma presented in an example, explore a detailed overview of both interest-bearing and non-interest-bearing notes, and see how to put it all together.


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