Question

On January 1, Luther Co. issued a $1,000,000, five-year, 8% installment note payable with payments of $250,456 principal plus interest due on January 1 of each year for the next five years.

Required:

1.

Prepare the adjusting journal entry at December 31 to accrue interest for the year. Refer to the Chart of Accounts for exact wording of account titles.

2.

Show the account(s) and amount(s) and where it(they) will appear on a multi-step income statement prepared on December 31.

3.

Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31.

CHART OF ACCOUNTS

Luther Co.

General Ledger

	ASSETS
110	Cash
111	Petty Cash
112	Accounts Receivable
113	Allowance for Doubtful Accounts
114	Notes Receivable
115	Interest Receivable
121	Merchandise Inventory
122	Supplies
131	Prepaid Insurance
140	Land
151	Building
152	Accumulated Depreciation-Building
153	Equipment
154	Accumulated Depreciation-Equipment

	LIABILITIES
210	Accounts Payable
221	Salaries Payable
231	Sales Tax Payable
241	Notes Payable
242	Interest Payable
251	Bonds Payable
252	Discount on Bonds Payable
253	Premium on Bonds Payable

EQUITY

310

Luther Marksberry, Capital

311

Luther Marksberry, Drawing

312

Income Summary

Amount Descriptions

Interest Payable

Note Payable

Note Payable-Current Portion

Prepare the adjusting journal entry at December 31 to accrue interest for the year. Refer to the Chart of Accounts for exact wording of account titles.

PAGE 1

JOURNAL

	DATE	DESCRIPTION	POST. REF.	DEBIT	CREDIT
1
2

Show the account(s) and amount(s) and where it(they) will appear on a multi-step income statement prepared on December 31.

Interest Expense

$ reported as Other expense.

Show the account(s) and amount(s) and where it(they) will appear on a classified balance sheet prepared on December 31. Refer to the lists of Amount Descriptions for the exact wording of the answer choices for text entries.

Partial Balance Sheet

1	Current Liabilities:
2
3
4	Long-Term Liabilities:
5

	REVENUE
410	Sales
610	Interest Revenue
611	Gain on Redemption of Bonds

	EXPENSES
510	Cost of Merchandise Sold
511	Bad Debt Expense
512	Credit Card Expense
513	Cash Short and Over
521	Salaries Expense
531	Advertising Expense
532	Delivery Expense
533	Repairs Expense
534	Rent Expense
535	Insurance Expense
536	Supplies Expense
551	Depreciation Expense-Building
552	Depreciation Expense-Equipment
590	Miscellaneous Expense
710	Interest Expense
711	Loss on Redemption of Bonds

Answer 1

1. Adjusting journal entry at December 31 to accrue interest for the year is as shown below:

Year	Particulars	L.F	Debit	Credit
Dec-31	Interest Expense		80,000
	Interest payable			80000
	(For Interest accrued)
	1,000,000*8%

2. Amount and accounts that will appear in the multi-step Income Statement will be Interest expense which will be shown under Other Expenses for $80,000.

Interest payable of $80,000 will be shown under Current Liabilities in Balance Sheet.