Question

The following items were selected from among the transactions completed by Sherwood Co. during the current year:

Mar.	1	Purchased merchandise on account from Kirkwood Co., $396,000, terms n/30.
	31	Issued a 30-day, 4% note for $396,000 to Kirkwood Co., on account.
Apr.	30	Paid Kirkwood Co. the amount owed on the note of March 31.
Jun.	1	Borrowed $174,000 from Triple Creek Bank, issuing a 45-day, 4% note.
Jul.	1	Purchased tools by issuing a $258,000, 60-day note to Poulin Co., which discounted the note at the rate of 7%.
	16	Paid Triple Creek Bank the interest due on the note of June 1 and renewed the loan by issuing a new 30-day, 6.5% note for $174,000. (Journalize both the debit and credit to the notes payable account.)
Aug.	15	Paid Triple Creek Bank the amount due on the note of July 16.
	30	Paid Poulin Co. the amount due on the note of July 1.
Dec.	1	Purchased equipment from Greenwood Co. for $400,000, paying $114,000 cash and issuing a series of ten 4% notes for $28,600 each, coming due at 30-day intervals.
	22	Settled a product liability lawsuit with a customer for $311,500, payable in January. Accrued the loss in a litigation claims payable account.
	31	Paid the amount due to Greenwood Co. on the first note in the series issued on December 1.

	Required:
1.	Journalize the transactions. Refer to the Chart of Accounts for exact wording of account titles. Assume a 360-day year. Round your answers to the nearest dollar.
2.	Journalize the adjusting entry for each of the following accrued expenses at the end of the current year (refer to the Chart of Accounts for exact wording of account titles): a. Product warranty cost, $28,000. b. Interest on the nine remaining notes owed to Greenwood Co. Assume a 360-day year.

Answer 1

Chart of accounts is not provided. So I have used most relevant account names in the journal entries.

Date

Account Titles and Explanation

Debit

Credit

Mar-01

Merchandise Inventory A/c          Dr.

$396,000

To Accounts Payable A/c

$396,000

(Purchased merchandise on account from Kirkwood Co., n/30)

Mar-31

Accounts Payable A/c                         Dr.

$396,000

To 4% Note payable A/c

$396,000

(Issued a 30-day 4% note payable to Kirkwood)

Apr-30

4% Note payable A/c                          Dr.

$396,000

Interest expense A/c                          Dr.

$1,320

To Cash A/c

$397,320

(Paid 4% note with interest to Kirkwood)

Jun-01

Cash A/c                                               Dr.

$174,000

To 4% Note payable A/c

$174,000

(Borrowed 45-day 5% note payable from Triple Creek Bank)

Jul-01

Tools A/c                                            Dr.

$254,990

Interest Expense A/c                         Dr.

$3,010

To 7% Note payable A/c

$258,000

(Issued a 60-day notes for purchase of tools which is discounted at 7%)

Jul-16

Interest Expense A/c                        Dr.

$870

5% Note payable A/c                        Dr.

$174,000

To Cash A/c

$870

To 4% Note payable A/c

$174,000

(Paid the interest on previous note and renewed the note)

Aug-15

Interest Expense A/c                        Dr.

$943

4% Note Payable A/c                        Dr.

$174,000

To cash A/c

$174,943

(Paid the note payable and interest to Triple creek bank)

Aug-30

7% Note Payable A/c                       Dr.

$258,000

To Cash A/c

$258,000

(Paid the note payable due to Poulin Co.)

Dec-01

Equipment A/c                                Dr.

$400,000

To Cash A/c

$114,000

To 9% Series Note payable A/c

$286,000

(Purchase of equipment and issue of 10 series of 9% note payable)

Dec-22

Litigation claim expense A/c       Dr.

$311,500

Litigation claim payable A/c

$311,500

(Accrued the litigation claim payable)

Dec-31

Interest expense A/c                    Dr.

$2,145

To Cash A/c

$2,145

(Interest expense paid on first interval)

Notes:

Apr 30. Interest on 4% note payable for 30 days with 360- days year will be $396000*4%*1/12 = $1320

Jul 1. Issued a 60-day note to Poulin Co. and he discounted that at a rate of 7%. The discount will be $258000 * 7% * 60/360 = $3010. It is the interest expense. The tools value will be $258000-3010 =

254990

Jul 16. Interest on 45- day 4% note issued to Triple Creek Bank will be $174000 * 4% * 45/360 =

870

Aug 15 Interest on 30- day 4% note renewed to Triple creek bank will be $174000*6.5%*30/360

942.5

Dec 31 Interest on 9% note payable will be $286000*9%*30/360

2145

Date

Account Titles and Explanation

Debit

Credit

Dec-31

Product Warranty Expense A/c          Dr.

$28,000

To Product Warranty Payable A/c

$28,000

(Accrue Product warranty payable)

Dec-31

Interest expense A/c                         Dr.

$858

To Accrued interest A/c

$858

(Accrue interest on remaining series of notes payable)

Notes:

Interest accrued on 9 remaining notes will be as follows $28600 * 9 * 4% * 30/360 = $

858