Question

Problem 13-4 Various liabilities [LO13-1, 13-2, 13-3, 13-4]

The unadjusted trial balance of the Manufacturing Equitable at December 31, 2018, the end of its fiscal year, included the following account balances. Manufacturing’s 2018 financial statements were issued on April 1, 2019.
   

Accounts receivable	$	92,500
Accounts payable		35,000
Bank notes payable		600,000
Mortgage note payable		1,200,000

   
Other information:

1. The bank notes, issued August 1, 2018, are due on July 31, 2019, and pay interest at a rate of 10%, payable at maturity.
2. The mortgage note is due on March 1, 2019. Interest at 9% has been paid up to December 31 (assume 9% is a realistic rate). Manufacturing intended at December 31, 2018, 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.
3. Included in the accounts receivable balance at December 31, 2018, 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.
4. On November 1, 2018, 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, 2019, was received as required and was credited to rent revenue.

   
Required:
1. Prepare any necessary adjusting journal entries at December 31, 2018, pertaining to each item of other information (a–d).
2. Prepare the current and long-term liability sections of the December 31, 2018, balance sheet.

Answer 1

1.

Transaction	General Journal	Debit	Credit
a.	Interest expense ($600000 x 10% x 5/12)	25000
	Interest payable		25000
	(To record interest accrued on bank notes payable)
b.	No journal entry required
c.	Accounts receivable	18000
	Advances from customers		18000
	(To record advances from customers)
d.	Rent revenue ($30000 x 10/12)	25000
	Unearned rent revenue		25000
	(To record unearned rent revenue)

2.

Manufacturing Equitable
Balance Sheet (Partial)
December 31, 2018
Current liabilities:
Accounts payable	35000
Bank notes payable	600000
Long-term debt (current portion)	250000
Interest payable	25000
Advances from customers	18000
Unearned rent revenue	25000
Total current liabilities	953000
Long-term liabilities:
Mortgage note payable	950000