Question

Presented below is a list of possible transactions.

·       1.   Purchased inventory for $80,000 on account (assume perpetual system is used).

·       2.   Issued an $80,000 note payable in payment on account (see item 1 above).

·       3.   Recorded accrued interest on the note from item 2 above at 10%. Assume the note is a one-year note and 3 months have passed.

·       4.   Signed a $100,000 note from the bank by signing a 6-month, zero-interest-bearing note. Prevailing annual interest rate is 10%.

·       5.   Recognized 4 months' interest expense on the note from item 4 above.

·       6.   Recorded sales revenue of $75,260 on account, which includes 5% sales tax.

·       7.   Incurred a contingency loss of $45,000 on a lawsuit. The company’s lawyer believes there is a reasonable possibility that the company could lose.

·       8.   Accrued warranty expense of 15,000 on sales.

·       9.   Paid warranty costs that were accrued in item 8 above.

·       10. Purchased goods for $85,000 subject to a cash discount, terms of 2/10, n/30. Purchases and accounts payable are recorded at net amounts after cash discounts (assume perpetual system is used).

·       11. Paid the invoice from 10. above, thirty days later.

Required

Record the journal entries (if needed) for the above transactions.

Answer 1

Date	Account Titles and Explanation	Debit	Credit
1	Inventory	$ 80,000
	Accounts Payable		$    80,000
2	Accounts Payable	$ 80,000
	Notes Payable		$    80,000
3	Interest Expense	$    2,000
	Interest Payable (80000 x 10% x 3/12)		$      2,000
4	Cash (100000/1.05)	$ 95,238
	Discount on notes payable	$    4,762
	Notes Payable		$ 100,000
5	Interest Expense (95238 x 10% x 4/12)	$    3,175
	Discount on notes payable		$      3,175
6	Accounts receivable	$ 75,260
	Sales revenue (75260/105%)		$    71,676
	sales tax payable		$      3,584
7	Loss from lawsuit-estimated	$ 45,000
	Estimated liability from lawsuit		$    45,000
8	Warranty Expense	$ 15,000
	Accrued warranty liability		$    15,000
9	Accrued warranty liability	$ 15,000
	Cash		$    15,000
10	Inventory (85000-85000 x 2%)	$ 83,300
	Accounts Payable		$    83,300
11	Accounts Payable	$ 83,300
	Inventory	$    1,700
	Cash		$    85,000