Question

at the end of 2025, the following information is available for great adventures. additional interest for five months needs to be accrued on the $30,000, 6% note payable obtained on august 1, 2024. recall that annual interest is paid each july 31.assume that $10,000 of the $30,000 note discussed above is due next year. record the entry to reclassify the current portion of the long-term note.by the end of the year, $20,000 in gift cards have been redeemed. the company had sold gift cards of $25,000 during the year and recorded those as deferred revenue.great adventures is a defendant in litigation involving a biking accident during one of its adventure races. the company believes the likelihood of payment occurring is probable, and the estimated amount to be paid is $12,000.for sales of mu watches, great adventures offers a warranty against defect for one year. at the end of the year, the company estimates future warranty costs to be $4,000.

Answer 1

Accrued $750 interest on $30,000, 6% note payable, accrued for five months till end of 2025.

Journal Entries for Great Adventures

To record the additional interest accrued on the $30,000, 6% note payable over five months, we need to calculate the interest first. The interest for one month would be ($30,000 × 6%) / 12 = $150. For five months, it would be $150 × 5 = $750. The journal entry to accrue the interest expense is:

• Interest Expense $750
• Interest Payable $750

To reclassify the current portion of the long-term note, the entry would be:

• Current Portion of Long-Term Debt $10,000
• Long-Term Debt $10,000

As for the gift cards, since $20,000 worth of gift cards have been redeemed from the $25,000 sold, the entry is:

• Deferred Revenue $20,000
• Revenue $20,000

For the litigation involving a biking accident, given the payment is probable and estimated at $12,000, we book a provision:

• Legal Expenses $12,000
• Litigation Payable $12,000

Regarding warranty costs estimated at $4,000, the journal entry is:

• Warranty Expense $4,000
• Warranty Liability $4,000

Answer 2

1. Accrued Interest on Note Payable is $750

2. Reclassify Current Portion of Long-Term Note is $10,000

3. Redeemed Gift Cards is $20,000

4. Litigation Provision is $12,000.

5. Warranty Provision is $4,000.

What inform the Journal entries?

Let's break down the information and record the necessary journal entries for Great Adventures:

1. Accrued Interest on Note Payable:

- Great Adventures needs to accrue interest for the five months from August 1, 2025, to December 31, 2025.

- Principal amount: $30,000

- Interest rate: 6%

The interest expense can be calculated using the formula: Interest = Principal × Rate × Time

Interest = $30,000 × 6% × (5/12) = $750

Journal Entry: DR CR

December 31, 2025

Interest Expense $750

Interest Payable $750

2. Reclassify Current Portion of Long-Term Note:

- $10,000 of the $30,000 note is due next year.

Journal Entry: DR CR

December 31, 2025

Current Portion of Long-Term Note Payable $10,000

Long-Term Note Payable $10,000

3. Redeemed Gift Cards:

- $20,000 in gift cards have been redeemed.

Journal Entry: DR CR

December 31, 2025

Deferred Revenue $20,000

Sales Revenue $20,000

4. Litigation Provision:

- The company is involved in litigation, and the likelihood of payment is probable, with an estimated amount of $12,000.

Journal Entry: DR CR

December 31, 2025

Litigation Expense $12,000

Litigation Liability $12,000

5. Warranty Provision:

- The company estimates future warranty costs to be $4,000.

Journal Entry: DR CR

December 31, 2025

Warranty Expense $4,000

Estimated Warranty Liability $4,000

These entries should help Great Adventures accurately reflect its financial position at the end of the year based on the provided information.