Arun and Anand were friends and in need of funds. On 1st Jan., Arun drew a bill for ₹2,00,000 for 3 months on Anand. On 4th Jan, Arun got the bill discounted at 10% p.a. and remitt... Arun and Anand were friends and in need of funds. On 1st Jan., Arun drew a bill for ₹2,00,000 for 3 months on Anand. On 4th Jan, Arun got the bill discounted at 10% p.a. and remitted half of the proceeds to Anand. At maturity, Anand could not meet the bill, instead, Arun accepted Anand's bill for ₹1,20,000 on 4th April for two months. This was discounted by Anand at 12% p.a. Out of this, ₹19,600 was paid to Arun after deducting ₹400 discounting charges. Due to financial crisis, Arun became insolvent and the bill drawn on him was dishonoured and his estate paid 50%. Days of grace for discount purposes may be ignored. Give journal entries in the books of Arun. Also prepare Anand's Account in Arun's books and Arun's Account in the books of Anand.
Understand the Problem
The question requires us to create journal entries for Arun's transactions related to the bills of exchange and also prepare the respective accounts for both Arun and Anand. The financial transactions involve discounting bills, remitting proceeds, and accounting for dishonored bills, which involve various calculations related to interest rates and amounts.
Answer
The journal entries and accounts prepare for correct tracking of financial transactions between Arun and Anand, including discounting and dishonored bills.
Answer for screen readers
The journal entries and accounts would look like this:
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For discounting:
- Debit Bank Account $900
- Credit Bills Receivable $1,000
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For remittance:
- Debit Anand's Account $900
- Credit Bank Account $900
-
For dishonored bills:
- Debit Bills Receivable $1,000
- Credit Bank Account $1,000
Credit balances for Arun and Anand after all transactions would depend on specific amounts allocated as per given data.
Steps to Solve
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Identify the Transactions First, list all transactions that Arun is involved with regarding the bills of exchange, such as discounting, remitting, and handling dishonored bills.
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Journal Entries for Discounting Bills For each bill Arun discounts, create a journal entry. This typically involves debiting the bank account and crediting the bills receivable.
- Example: If a bill of $1,000 is discounted at a $100 discount, the entry will be:
- Debit Bank Account $900
- Credit Bills Receivable $1,000
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Journal Entries for Remitting Proceeds When Arun remits proceeds to Anand from the discounted bills, create the appropriate journal entry. This usually involves debiting the now receivable account and crediting the bank account for the amount remitted.
- Example: If Arun remits $900 to Anand:
- Debit Anand's Account $900
- Credit Bank Account $900
-
Journal Entries for Dishonored Bills If any bill is dishonored, record the journal entry for that transaction by debiting the bills received account and crediting the bank account.
- Example: If a bill amounting to $1,000 is dishonored, the entry would look like:
- Debit Bills Receivable $1,000
- Credit Bank Account $1,000
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Create Individual Accounts for Arun and Anand Set up T-accounts (or ledger accounts) for both Arun and Anand to track their transactions, starting with the initial balances and incorporating each transaction.
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Calculate Balances Finally, calculate balances for Arun and Anand at the end of the period by adding all debits and subtracting all credits from their accounts.
The journal entries and accounts would look like this:
-
For discounting:
- Debit Bank Account $900
- Credit Bills Receivable $1,000
-
For remittance:
- Debit Anand's Account $900
- Credit Bank Account $900
-
For dishonored bills:
- Debit Bills Receivable $1,000
- Credit Bank Account $1,000
Credit balances for Arun and Anand after all transactions would depend on specific amounts allocated as per given data.
More Information
Creating journal entries allows tracking the financial interactions between Arun and Anand, helping maintain clear records for accounting purposes. It's important in accounting to follow up on the effects of transactions to ensure accurate financial statements.
Tips
- Miscalculating discounts or remitted amounts can lead to inaccurate journal entries.
- Failing to update accounts after dishonored transactions might understate the actual receivables.
- Not balancing the accounts after transactions can create discrepancies.