Question

The unadjusted trial balance of the Manufacturing Equitable at December 31, 2011, the end of its fiscal year, included the following account balances. Manufacturing�s 2011 financial statements were issued on April 1, 2012.

Accounts receivable $ 92,500
Accounts payable 35,000
Bank notes payable 600,000
Mortgage note payable 1,200,000
Other information:
a. The bank notes, issued August 1, 2011, are due on July 31, 2012, and pay interest at a rate of 10%, payable at maturity.
b. The mortgage note is due on March 1, 2012. Interest at 9% has been paid up to December 31 (assume 9% is a realistic rate). Manufacturing intended at December 31, 2011, to refinance the note on its due date with a new 10-year mortgage note. In fact, on March 1, Manufacturing paid $250,000 in cash on the principal balance and refinanced the remaining $950,000.
c. Included in the accounts receivable balance at December 31, 2011, were two subsidiary accounts that had been overpaid and had credit balances totaling $18,000. The accounts were of two major customers who were expected to order more merchandise from Manufacturing and apply the overpayments to those future purchases.
d. On November 1, 2011, Manufacturing rented a portion of its factory to a tenant for $30,000 per year, payable in advance. The payment for the 12 months ended October 31, 2012, was received as required and was credited to rent revenue.
Required:
(1) Prepare any necessary adjusting journal entries at December 31, 2011, pertaining to each item of other information (a�d).
(2) Prepare the current and long-term liability sections of the December 31, 2011, balance sheet.

Answer 1

1. A.

Dec 31

DR Interest Expense ...............................................$25,000

CR Interest Payable ..................................................................$25,000

(To record interest payable on bank notes for the year)

Working

= 10% * 600,000

= $60,000 per year

August to December 5 months

= 60,000/ 12 months * 5

= $25,000

B. No entry required. Payment of $250,000 shall be considered short term liability as it is to be paid in less than a year. The $950,000 shall be a long term liability.

C.

Dec 31,

DR Accounts Receivable...............................................$18,000

CR Advance from Customers.......................................................$18,000

D.

Dec 31,

DR Rent Revenue ............................................................$25,000

CR Rent received in advance.........................................................$25,000

Working

Rent is $30,000 from the tenant starting November 1 which means rent needs to be apportioned to 2 months in 2011.

= 30,000/12 moths * 2

= $5,000

Rent to be recorded as received in advance;

= 30,000 - 5,000

= $25,000

2.

..................................Liabilities as at December 31, 2011............................

Current Liabilities

Accounts Payable ......................................................$35,000

Current Portion of debt .............................................$250,000

Advance from Customers.........................................$18,000

Accrued Interest payable..........................................$25,000

Unearned rent revenue.............................................$25,000

Bank notes payable....................................................$600,000

Total................................................................................$953,000

Long Term Liabilities

Mortgage Note Payable ............................................$950,000

Total .................................................................................$950,000