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CMA Intermediate · Financial Accounting · Bills of Exchange

Das & Co. accepted a Rs 40,000 bill drawn by Roy Ltd. Before maturity Das & Co. requested renewal; Roy Ltd. agreed to cancel the old bill and draw a new 3-month bill including interest of Rs 800. What is the entry in Das & Co.'s books on renewal?

Das & Co. cancels the old bill by debiting Bills Payable 40,000 and Interest 800 and crediting Roy Ltd 40,800, then records the new bill by debiting Roy Ltd and crediting Bills Payable 40,800. Interest is an expense and no cash moves.

  1. ADebit Bills Payable 40,000 and Interest 800, credit Roy Ltd 40,800; then debit Roy Ltd 40,800, credit Bills Payable 40,800Correct
  2. BDebit Bills Payable 40,000, credit Roy Ltd 40,000 only
  3. CDebit Roy Ltd 800, credit Interest 800
  4. DDebit Bills Payable 40,800, credit Bank 40,800

Explanation

Renewal is treated as cancellation of the old bill and acceptance of a new one. The old bill is cancelled by debiting Bills Payable 40,000, and interest of Rs 800 is an expense debited to Interest, with Roy Ltd credited Rs 40,800. The new bill then debits Roy Ltd and credits Bills Payable Rs 40,800. Other options omit the interest or involve cash that was never paid.

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