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    Meli083's Avatar
    Meli083 Posts: 4, Reputation: 1
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    #1

    May 31, 2009, 11:37 AM
    Perpetual Inventory Method
    I am having trouble answering these questions and showing them in the journal.

    Paid monthly mortgage payment of $25,000 – note this amount includes mortgage interest of $7,500 not previously accrued;
    For this one I have tried debiting mortgage as an expense ($17500) crediting cash. For the $7500: debit interest due and credit cash?

    Signed a contract to supply $275,000 of merchandise to local customer;
    Debit accounts receivable, credit inventory? That can't be, so how do I take into account the contract. Btw, it says nothing about cost of sales probably because the sale hasn't actually been made.

    Paid $6,000 of current note payable; also paid $750 of interest previously accrued on this note; Debit note payable, credit cash $6000. For the interest, do I treat it as an expense, debit interest payable and credit cash $750?

    Collected $5,000 of notes receivable; also collected interest previously accrued on this note of $550; For the interest accrued, debit interst payable, credit cash?

    Last one: Received a $19,000 prepayment from a customer on an upcoming sales contract. This down payment is for a special component subassembly used in the final product. No goods have been delivered. No component assembly has begun.
    Debit cash, credit sales?

    Any help would be appreciated.
    helemuo's Avatar
    helemuo Posts: 19, Reputation: 1
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    #2

    May 31, 2009, 08:41 PM
    Dr Mortgage Account $25,000
    Cr Cash account 25,000
    Dr Mortgage interest $7,500
    Cr mortgage Account $7,500
    Note: crediting mortgage account with 7,500 removes the interest charge. Debiting mortgage interest means it is now accrued and should appear in income statement

    (2) Dr Account receivable $275,0000
    Cr Sales Revenue $275,000. No action required on inventory account (cost not given)

    (3) Dr Note Payable 6,000
    Cr Cash Account 6,000
    Dr interest expense 750
    Cr Cash Account 750
    Dr Note Payable 750
    Cr interest payable 750
    Note: multiple entry of 750 is required. Note that cash account showed total charge of 6,750. The corresponding entry is note payable 6,750
    You got the idea?
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #3

    Jun 1, 2009, 12:24 AM
    Dr Mortgage interest $7,500
    Cr mortgage Account $7,500
    Note: crediting mortgage account with 7,500 removes the interest charge. Debiting mortgage interest means it is now accrued and should appear in income statement
    How so? Crediting the mortgage just puts it onto the payable account and increases the note. How does that "remove" the interest charge? Remove it from where? It's never been recorded anywhere to remove from anywhere.

    (2) Dr Account receivable $275,0000
    Cr Sales Revenue $275,000. No action required on inventory account (cost not given)
    Contract signed. What has been earned?

    Dr interest expense 750
    Cr Cash Account 750
    Dr Note Payable 750
    Cr interest payable 750
    Note: multiple entry of 750 is required. Note that cash account showed total charge of 6,750. The corresponding entry is note payable 6,750
    ? It says it was accrued. That means the interest expense was already recorded and put into an interest payable. You're trying to duplicate an entry that has already been made. And you can't do 6750 to the note payable because interest isn't in the note payable. It's in interest payable.
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #4

    Jun 1, 2009, 12:39 AM
    Paid monthly mortgage payment of $25,000 – note this amount includes mortgage interest of $7,500 not previously accrued;
    For this one I have tried debiting mortgage as an expense ($17500) crediting cash. For the $7500: debit interest due and credit cash?
    There isn't any such thing as mortgage expense. You are paying on a mortgage that should be recorded in the liabilities as Mortgage Note Payable or some such name. And you're paying $25K of it, which will reduce that account, which is a debit. The credit to cash is fine. The interest is almost correct, except it's not called "interest due" - it's Interest Expense. There's your expense. (The mortgage isn't the expense - the interest is.) You need to have the word "expense" on there so that it shows what kind of account it is. "Due" isn't a kind of account. You could have interest payable, interest revenue -- see, you have to make note that it's an expense and not something else. Those seemingly unimportant words are important.

    You can combine this as one entry by debiting 25,000 to the mortgage payable, 7500 to interest expense, and credit to cash at 32,500 (if I did my math right at 3:30 a.m. LOL).

    Signed a contract to supply $275,000 of merchandise to local customer;
    Debit accounts receivable, credit inventory? That can't be, so how do I take into account the contract. Btw, it says nothing about cost of sales probably because the sale hasn't actually been made.
    You're right that "that can't be." Because there's nothing due to your company yet, so no receivable. Nothing has come out of inventory yet, because no sale yet. And you also can never combine A/R with inventory, even if you'd made the sale. A/R has to be at retail and inventory is at cost. So that never works.

    There is no entry. There's no economic event. There's a contract to have an economic event in the future, but it hasn't happened yet. A contract is a legal thing, not an accounting thing.

    Paid $6,000 of current note payable; also paid $750 of interest previously accrued on this note; Debit note payable, credit cash $6000. For the interest, do I treat it as an expense, debit interest payable and credit cash $750?
    You're mostly right -- as for the interest, since it says it was previously accrued, that means it's in interest payable, and you debit it back out. The interest expense was recorded at the time the accrual was done - that's what it means to accrue it. Everything else is correct. (Again, you can combine that into one entry.)

    Collected $5,000 of notes receivable; also collected interest previously accrued on this note of $550; For the interest accrued, debit interst payable, credit cash?
    If you have a receivable, a customer owes you. So why do you owe the customer interest? You don't. And you won't be paying them any interest either. You have to be consistent about who owes who. They owe you. It's a debit to cash and credit to interest receivable.

    Last one: Received a $19,000 prepayment from a customer on an upcoming sales contract. This down payment is for a special component subassembly used in the final product. No goods have been delivered. No component assembly has begun.
    Debit cash, credit sales?
    There's no sale, so you can't record one. This is unearned revenue. That is, you've been paid ahead of time but have not earned the revenue yet. You owe the goods, so it's a liability. You can call it unearned revenue, deferred revenue, deferred sales, or customer prepayments or customer deposits, or just all sorts of things. As long as it reflects what it is and must be a liability and a credit.

    Overall, pretty decent job there. You've got a decent concept of things and just muffed up a few ideas.
    Meli083's Avatar
    Meli083 Posts: 4, Reputation: 1
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    #5

    Jun 1, 2009, 05:41 AM

    Wow, that was fast. Thanks, your answers really helped.
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #6

    Jun 1, 2009, 11:35 AM

    You're welcome. We get people upset if we don't answer in 10 minutes, so that's nice to hear, thanks. :-)

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