Mountain Bikes Pty Ltd markets mountain-bike tours to clients vacationing in various locations in the Blue Mountains. In preparation for the upcoming winter biking season, the entity entered into the following transactions related to notes payable.
Mar 1 Purchased Mongoose bikes for use as rentals by issuing $8000, 9% note payable that is due in 3 months.
31 Recorded accrued interest for the Mongoose Note.
Apr. 1 Issued a $20,000 note to Highland Property for the purchase of mountain property on which to build bike trails. The note bears 12% interest and is due in 9 months.
May 30 Recorded accrued interest for the Mongoose note and the Highland Property note.
June 1 Issued a note to Telluride National Bank for $15,000 at 6%. The funds will be used for working capital for the beginning of the season; the note is due in 4 months.
31 Recorded accrued interest for all three notes.
1 Paid principal and interest on the Mongoose note.
30 Recorded accrued interest for the Highland Property note and the Telluride Bank note.
Required:
(a) Prepare journal entries for the transactions.
(b) Post the entries to the Notes Payable , Interest Payable, and Interest Expense accounts. (Use T accounts).
(c) Assuming that Mountain Bikes' year-end is 30 June, show the statement of financial position presentation of notes payable and interest payable at that date.
(d) How much interest expense relating to notes payable did Mountain Bikes incur during the year?
(e) Discuss the advantage and disadvantage of purchasing inventory by means of a note payable rather than accounts payable.