Exercise 13-02 The following are selected 2020 transactions of Sandhill Corporation.

Sept.1 Purchased inventory from Encino Company on account for $52,000. Sandhill records purchases gross and uses a periodic inventory system.
Oct. 1 Issued a $52,000, 12-month, 8% note to Encino in payment of account.
Oct. 1 Borrowed $52,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $56,400 note.

a. Prepare journal entries for the selected transactions above.
b. Prepare adjusting entries at December 31.
c. Compute the total net liability to be reported on the December 31 balance sheet for:

i. The interest-bearing note
ii. The zero-interest-bearing note

Explanation:

a. The journal entries are as follows:

1. Purchase A/c Dr $52,000

     To Account payable A/c $52,000

(Being the purchase of inventory is recorded)

2. Account payable A/c $52,000

           To Notes payable A/c

(Being the payment is done via note payable)

3. Cash A/c Dr $52,000

Discount on Note payable A/c Dr $4,400

       To Note payable A/c $56,400

(Being the borrowed amount is recorded)

b.

Interest expense A/c Dr $1,040

      To Interest payable A/c $1,040

(Being the interest expense is recorded)

The computation is shown below:

= $52,000 × 8% × 3 months ÷ 12 months

= $1,040

Interest expense A/c Dr $1,040      ($4,160 × 3 months ÷ 12 months)

     To Discount on notes payable A/c $1,040

(Being the interest expense is recorded)

c. Now the total net liability is

i. For the interest-bearing note

= Note payable + interest payable

= $52,000 + $1,040

= $53,040

ii. For zero-interest-bearing note

= $56,400 - $3,120      ($4,160 - 1,040)

= $53,280

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