Mikor has an account payable of 7,700$ due to Smiley Inc. one of its suppliers. The amount was due to be paid on October 15, 2007. Mikor only had enough cash on hand then to pay $1,700 of the amount due, so Mikors treasurer called and Smiley's treasurer and agreed to sign a note payable for the balance. The note was dated October 15, 2007, and had an interest rate of 8% per annum, and was payable with interest on Dec. 31, 2007.
Use the horizontal model, or write the journal entry to show the effect of :
a. the october 15, 2007 payment of 1,700$ and the creation of a note payable for the balance owed.
b. The October 31, 2007 accrual of interest expense for the month of October.
c. The December 31, 2007 payment of the note and all of the interest due. Interest for the Nov and Dec had not been accrued.
Journal Entry to record the transaction should be as follows
15-Oct-07 Debit Account Payable - 7,700 (This is reduce the AP by Smiley's Amount)
The solution provides journal entry to record transaction related to change in accounts payable to notes payable and recording interest on notes payable.