Chapter 10 sample test

# Chapter 10 sample test - Chapter 10 sample test 1 The First...

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Chapter 10 sample test 1. The First Corporation borrowed \$5,000 from its bank by signing a 6% note on January 2. The loan and interest are to be paid to the bank after 90 days. Determine the total dollar amount of cash the company must pay to the bank after 90 days. The key to this problem is to recognize that after 90 days the company must pay the bank principal and interest. The principal is \$5,000. Interest = principal x interest rate x time. Interest = \$5,000 (principal) x .06 (annual interest rate) x 90/365 (number of days for which the cash was borrowed / number of days in the year)= \$73.97. Total cash paid at the end of 90 days = \$5,000 principal + \$73.97 interest = \$5,073.97. See text exercise 10.1 for similar material. 2. The Second Corporation borrowed \$5,000 from its bank by signing a 6% note in February. The company's interest expense for February is \$12. The loan and interest are to be paid to the bank after 90 days. Prepare the journal entry the company would make to record its February interest expense. The keys to this problem are to recognize that expenses increase with debits and liabilities increase with credits. The interest payable liability increases because the interest will not be paid until May. Date Description Debits Credits Feb. 28 Interest Expense 12 Interest Payable 12 February interest expense See text exercise 10.2 for similar material. 3. The Third Corporation borrowed \$10,000 from its bank by signing an 8% note on March 1. The loan and interest were to be paid to the bank after 30 days. The Third Corporation used the \$10,000 to buy merchandise it sold to customers in March for \$18,000. At the end of 30 days, the company paid the bank \$10,000 plus interest. Determine the dollar amount by which the company’s resources increased by using notes payable to acquire merchandise and then selling the merchandise to customers.

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The key to this problem is to recognize that there is an interest expense involved in buying merchandise through borrowing. The company received \$18,000 from customers for merchandise that cost \$10,000 and interest of \$65.75 (\$10,000 x .08 x 30/365). The company's resources increased by \$7,934.25 in March. Revenue \$18,000.00 Expenses Cost of merchandise sold \$10,000.00 Interest Expense \$65.75 Total Expenses \$10,065.75 Increase in Income \$7,934.25 See text exercise 10.3 for similar material. 4. The Fourth Corporation purchased \$2,000 of merchandise on account on April 4. Purchase terms were 2/10, n/30. Determine the amount of cash the company would pay if it paid for its purchases on April 12. The key to this problem is to recognize that purchase terms of 2/10, n/30 mean that the company will receive a 2% discount if it pays its bill within ten days from the date of purchase. Since the company paid for the merchandise within the discount period, it would reduce the amount it owes by \$40 (\$2,000 x .02). The company would pay \$1,960
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## This note was uploaded on 10/09/2011 for the course ACCT 60.201 taught by Professor Monty during the Spring '11 term at UMass Lowell.

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Chapter 10 sample test - Chapter 10 sample test 1 The First...

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