Question

The unadjusted trial balance of the Manufacturing Equitable at December 31, 2016, the end of its fiscal year, included the following account balances. Manufacturing’s 2016 financial statements were issued on April 1, 2017. Accounts receivable $ 102,500 Accounts payable 39,400 Bank notes payable 614,000 Mortgage note payable 1,294,000 Other information: a. The bank notes, issued August 1, 2016, are due on July 31, 2017, and pay interest at a rate of 12%, payable at maturity. b. The mortgage note is due on March 1, 2017. Interest at 11% has been paid up to December 31 (assume 11% is a realistic rate). Manufacturing intended at December 31, 2016, to refinance the note on its due date with a new 10-year mortgage note. In fact, on March 1, Manufacturing paid $272,000 in cash on the principal balance and refinanced the remaining $1,022,000. c. Included in the accounts receivable balance at December 31, 2016, were two subsidiary accounts that had been overpaid and had credit balances totaling $19,750. 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, 2016, Manufacturing rented a portion of its factory to a tenant for $33,600 per year, payable in advance. The payment for the 12 months ended October 31, 2017, was received as required and was credited to rent revenue. Required: 1. Prepare any necessary adjusting journal entries at December 31, 2016, pertaining to each item of other information (a–d). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 2. Prepare the current and long-term liability sections of the December 31, 2016, balance sheet.

Answer 1

1.

(a).

From the information , it seems that the liability for the interest on the bank note for the 5 months from August1 to December 31, 2016 was not created.This is to be classifed as current liability. This requires the following entry to be recorded.

The amount will be $30,700 (614,000 x 12% x 5 / 12)

Ref	Account Title	Debit	Credit
a	Interest expense	30,700
	Interest Payable		30,700
	(Interest on bank notes for 5 months)

b.

, as the mortgage note is due on March31, 2017 and the interest for the year ended December 31, 2016 is already paid, it does not require any entry to be recorded. The note will be classified as current liability, since it is due within one year from the date of financial statements. The repayment and refinancing will be accounted in the current year i.e., year ending December31, 2017.

Ref	Account Title	Debit	Credit
b	No. entry required.

c.

The amount of credit balance of the two customers needs to be classified as current liability.o entry is required for this event. It neds only a reclassification in the balance sheet.

Ref	Acount Title	Debit	Credit
c	No entry required

d.

Since the rent received is for twelve months , rent received for the period from January1, 2017 to October 31, 2017 (10 months) needs to be recorded as a curent liability " Unrealised Rent Revenue".

The amount to be recorded as unrealised rent revenue will be $28,000 ($33,600 x 10 / 12).

Ref	Account Title	Debit	Credit
d	Rent Revenue	28,000
	Unrealised Rent Revenue		28,000
	(Rent received in advance for the period Jan.1,2017 - Oct.31, 2017)

2.

Manufacturing Equitable
Current Liabilities
Accounts Payable	59150
Bank note payable	614000
Mortgage Note payable	1294000
Total Current Liabilities	1967150
Long-Term Liabilities	0