On June 1, 2024, Ivanhoe Company purchases equipment on account from Moleski Manufacturers for $52,800. Ivanhoe is unable to pay its account on July 1, 2024, so Moleski agrees to accept a three-month, 7% note payable from Ivanhoe. Interest is payable the first of each month, starting August 1, 2024. Ivanhoe has an August 31 fiscal year end and adjusts its accounts on an annual basis.

Record all transactions related to the note for Ivanhoe Company. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select

"No Entry" for the account titles and enter 0 for the amounts. List all debit entries before credit entries.

Round answers to 0 decimal places, e.g. 5,275. Record journal entries in the order presented in the problem.)

Let's break this down and create the necessary journal entries for Ivanhoe Company in relation to the note payable.

### 1. **June 1, 2024** – Purchase of equipment on account
Ivanhoe purchased equipment worth $52,800 on account. Here is the journal entry to record this transaction:

**Journal Entry:**
- **Debit** Equipment: $52,800
- **Credit** Accounts Payable: $52,800

### 2. **July 1, 2024** – Note Payable issued for accounts payable
Ivanhoe is unable to pay the account on July 1, so they issue a 3-month, 7% note payable in place of the accounts payable. The note replaces the previous accounts payable.

**Journal Entry:**
- **Debit** Accounts Payable: $52,800
- **Credit** Notes Payable: $52,800

### 3. **August 1, 2024** – First interest payment on note
Interest is paid monthly on the note, starting August 1. The formula for calculating interest is:

\[
\text{Interest} = \text{Principal} \times \text{Rate} \times \text{Time}
\]

Where:
- Principal = $52,800
- Rate = 7% annually or 0.07
- Time = 1 month (1/12 of a year)

\[
\text{Interest} = 52,800 \times 0.07 \times \left( \frac{1}{12} \right) = 308
\]

Ivanhoe must pay $308 in interest on August 1. Here is the journal entry:

**Journal Entry:**
- **Debit** Interest Expense: $308
- **Credit** Cash: $308

### 4. **August 31, 2024** – Accrued interest at year-end
By August 31, another month has passed, and Ivanhoe will have to accrue interest for the second month (for September's interest) even though it has not yet been paid. The interest calculation remains the same, $308.

**Journal Entry:**
- **Debit** Interest Expense: $308
- **Credit** Interest Payable: $308

### 5. **September 1, 2024** – Second interest payment
On September 1, Ivanhoe pays the second month's interest of $308, which had been accrued as interest payable.

**Journal Entry:**
- **Debit** Interest Payable: $308
- **Credit** Cash: $308

---

These are the key journal entries related to the note payable from the point of purchase through the fiscal year-end (August 31). 

### Summary of Journal Entries:
1. **June 1, 2024:**
   - Equipment: $52,800 (Debit)
   - Accounts Payable: $52,800 (Credit)

2. **July 1, 2024:**
   - Accounts Payable: $52,800 (Debit)
   - Notes Payable: $52,800 (Credit)

3. **August 1, 2024:**
   - Interest Expense: $308 (Debit)
   - Cash: $308 (Credit)

4. **August 31, 2024:**
   - Interest Expense: $308 (Debit)
   - Interest Payable: $308 (Credit)

5. **September 1, 2024:**
   - Interest Payable: $308 (Debit)
   - Cash: $308 (Credit)

Would you like further details on any step? 

### Related Questions:
1. How do you calculate the interest payable on a note for longer periods?
2. What is the impact of year-end adjustments on the financial statements?
3. What happens if Ivanhoe doesn't pay interest on the due date?
4. How would the entry differ if Ivanhoe made payments on the principal during the note term?
5. What is the accounting treatment for interest payments at year-end in multi-year notes?

**Tip**: Always track interest accruals closely at fiscal year-end to ensure proper financial reporting.

On June 1, 2024, Ivanhoe Company purchases equipment on account from Moleski Manufacturers for $52,800. Ivanhoe is unable to pay its account on July 1, 2024, so Moleski agrees to accept a three-month, 7% note payable from Ivanhoe. Interest is payable the first of each month, starting August 1, 2024. Ivanhoe has an August 31 fiscal year end and adjusts its accounts on an annual basis. Record all transactions related to the note for Ivanhoe Company.

Learn how to record journal entries for Ivanhoe Company’s 7% note payable, including interest calculations and end-of-year adjustments. This solution provides step-by-step guidance on accounting for the note and interest payments. Suitable for university-level accounting or finance students.

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