Bugatti Company has a September 30 fiscal year end and prepares adjusting entries on an annual basis. The trial balance included the following selected accounts:

Accumulated depreciation................$ 4,250

Depreciation expense..............................0

Interest expense..............................3,333

Interest payable....................................0

Interest receivable.................................0

Interest revenue....................................0

Salaries expense...........................153,000

Salaries payable....................................0

Additional information for its September 30, 2014, year-end adjustments:

1. Bugatti has a two-year, 3.5% note receivable for $50,000 that was issued on April 1, 2014. Interest is payable every six months, on October 1 and April 1. Principal is payable at maturity. Bugatti collected the correct amount on October 1, 2014.

2. Accrued salaries as at September 30, 2014, were $2,400. Payroll totalling $3,000 was paid on October 2, 2014.

3. Bugatti has a five-year, 5% note payable for $80,000 issued in 2012. Interest is payable quarterly on January 31, April 30, July 31, and October 31 each year. Bugatti paid the correct amounts in 2014.

4. Depreciation expense for the year ended September 30, 2014, was $4,250.

Instructions

(a) Prepare T accounts and record the September 30, 2014, balances.

(b) Prepare and post adjusting journal entries for items 1 to 4 above.

(c) Prepare entries to close these revenue and expense accounts. Post to the T accounts. Do not post to the income summary account.

(d) Prepare and post reversing journal entries on October 1, 2014, as appropriate.

(e) Prepare and post the journal entry to record the cash transactions that occurred in October 2014.

Taking It Further

Comment on the usefulness of reversing entries.