Bennett Enterprises issues a $888,000, 30-day, 6%, note to Spectrum Industries for merchandise inventory.

Assume a 360 days in a year. If required, round your answers to the nearest dollar. If an amount box does not require an entry, leave it blank.

Question Content Area
a. Journalize Bennett Enterprises’ entries to record:

the issuance of the note.
the payment of the note at maturity.
TransactionAccountDebitCredit
1.

2.

Question Content Area
b. Journalize Spectrum Industries’ entries to record:

the receipt of the note.
the receipt of the payment of the note at maturity.
TransactionAccountDebitCredit
1.

2.

1 answer

Let's break the transactions down step by step for both Bennett Enterprises and Spectrum Industries.

a. Journalize Bennett Enterprises’ entries

  1. 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
    
  2. 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

  1. 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
    
  2. 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

  1. Issuance of the note:

    Merchandise Inventory       $888,000
         Notes Payable                                     $888,000
    
  2. Payment of the note at maturity:

    Notes Payable                  $888,000
         Interest Expense                               $4,440
         Cash                                        $892,440
    

Spectrum Industries

  1. Receipt of the note:

    Notes Receivable               $888,000
         Sales Revenue                                   $888,000
    
  2. 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.