Question

Lazaro Company bought inventory on September 1, 2020 worth $450,750 by issuing a $480,000 noninterest-bearing note...

Lazaro Company bought inventory on September 1, 2020 worth $450,750 by issuing a $480,000 noninterest-bearing note due in 9 months. The adjusting entry made by Lazaro on December 31, 2020 will:

Multiple Choice

  • Decrease stockholders’ equity by $13,000

  • Decrease discount on the notes payable by $9,750

  • Decrease carrying value of the notes payable by $13,000

  • Increase carrying value of the notes payable by $9,750

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Answer #1
In the given case the notes payable is non-interest bearing and has par value higher than the value of inventory
Discount on notes payable 480000-450750
Discount on notes payable $29,250
Till December 2020 4 months interest would be charged and thus discount on notes payable would reduce
Discount amortized 29250*(4/12)
Discount amortized $9,750
The adjusting entry would therefore be debit interest expense by $9,750 and credit discount on notes payable of $9,750
Thus, decrease discount on notes payable by $9,750 is correct option
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