Let's break the transactions down step by step for both Bennett Enterprises and Spectrum Industries.
a. Journalize Bennett Enterprises’ entries
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Issuance of the note:
When Bennett Enterprises issues the note, it will record a debit to the Merchandise Inventory account (since they are acquiring inventory) and a credit to Notes Payable (as they are creating a liability).
Transaction 1:
Date Account Debit Credit --------------------------------------------------------------- [Date] Merchandise Inventory $888,000 Notes Payable $888,000 -
Payment of the note at maturity:
At maturity, Bennett Enterprises will pay back the principal plus interest. The interest can be calculated as follows:
- Principal = $888,000
- Interest Rate = 6%
- Time (in years) = 30 days / 360 days = 1/12 years
Interest = Principal * Rate * Time Interest = $888,000 * 0.06 * (30/360) = $4,440
Now, when Bennett pays off the note, it will debit Notes Payable and interest expense and credit Cash.
Transaction 2:
Date Account Debit Credit --------------------------------------------------------------- [Date] Notes Payable $888,000 Interest Expense $4,440 Cash $892,440
b. Journalize Spectrum Industries’ entries
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Receipt of the note:
When Spectrum Industries receives the note, they will record a debit to Notes Receivable and a credit to Sales Revenue or Merchandise Inventory (depending on their accounting policy for recording sales).
Transaction 1:
Date Account Debit Credit --------------------------------------------------------------- [Date] Notes Receivable $888,000 Sales Revenue $888,000 -
Receipt of the payment of the note at maturity:
At maturity, Spectrum Industries receives the cash payment which includes the principal and interest. The entries will include the principal plus interest, just as calculated for Bennett Enterprises.
Total amount received = Principal + Interest Total amount received = $888,000 + $4,440 = $892,440
Transaction 2:
Date Account Debit Credit --------------------------------------------------------------- [Date] Cash $892,440 Notes Receivable $888,000 Interest Revenue $4,440
Summary of Entries:
Bennett Enterprises
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Issuance of the note:
Merchandise Inventory $888,000 Notes Payable $888,000 -
Payment of the note at maturity:
Notes Payable $888,000 Interest Expense $4,440 Cash $892,440
Spectrum Industries
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Receipt of the note:
Notes Receivable $888,000 Sales Revenue $888,000 -
Receipt of the payment of the note at maturity:
Cash $892,440 Notes Receivable $888,000 Interest Revenue $4,440
Please replace the [Date] placeholders with the actual transaction dates as necessary.
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