Indigo Had Previously Purchased Inventory from Larry for $40 000

question 7

Multiple Choice

Indigo had previously purchased inventory from Larry for $40 000. On 1 October Indigo gave Larry a 90-day, bill of exchange to cover the amount of the account payable plus interest at 10% p.a. The correct accounting entry in Indigo's books to record the settlement of the bill at maturity is:

• A) Debit bills payable $40 986; debit interest expense $986; credit bank $40 986; credit unexpired interest $986
• B) Debit bills payable $40 986; credit interest expense $986; credit bank $40 000.
• C) Debit bills payable $40 000; credit bank $40 000
• D) Debit bills payable $39 014; debit interest expense $986; credit bank $40 000

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Definitions:

Net Income

The amount of profit left after all operating expenses, interest, taxes, and preferred stock dividends have been deducted from total revenues.

Additional Investment

Funds invested into a business by its owners or shareholders over and above the initial investment.

Income Statement

A financial statement that reports a company's revenues, expenses, and profits over a specific period, showing the financial performance of the business.

Statement Of Owner's Equity

A financial document showing changes in the equity of a company over a certain period due to various business activities, such as earnings and withdrawals.