Question

Proco had an account payable of $6,400 due to Shirmoo Inc., one of its suppliers. The amount was due to be paid on January 31. Proco did not have enough cash on hand then to pay the amount due, so Proco's treasurer called Shirmoo's treasurer and agreed to sign a note payable for the amount due. The note was dated February 1, had an interest rate of 12% per annum, and was payable with interest on May 31.

Required:
Use the horizontal model to show the effects (+ for additional and for substraction) of each of these transactions and adjustments for Proco on the following:
A. February 1, to show that the account payable had been changed to a note payable.
B. March 31, to accrue interest expense for February and March.
C. May 31, to record payment of the note and all of the interest due to Shirmoo.

Answer 1

assets = liabilities + equity

a) NA - $6,400 AP

+ $6,400 NP

net effect $0

b) NA + $128 interest - $128 retained

payable earnings

c) -$6,528 cash -$6,400 NP NA

-$128 interest p.

revenue - expenses = income

a) NA NA NA

b) $0 $128 -$128

c) NA NA NA