Question

Liability Transactions

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

Feb. 15.	Purchased merchandise on account from Hood Co., $144,000, terms n/30.
Mar. 17.	Issued a 60-day, 6% note for $144,000 to Hood Co., on account.
May 16.	Paid Hood Co. the amount owed on the note of March 17.
June 15.	Borrowed $154,800 from Acme Bank, issuing a 60-day, 7% note.
July 21.	Purchased tools by issuing a $114,000, 90-day note to Columbia Supply Co., which discounted the note at the rate of 6%.
Aug. 14.	Paid Acme Bank the interest due on the note of June 15 and renewed the loan by issuing a new 60-day, 10% note for $154,800. (Journalize both the debit and credit to the notes payable account.)
Oct. 13.	Paid Acme Bank the amount due on the note of August 14.
Oct. 19.	Paid Columbia Supply Co. the amount due on the note of July 21.
Dec. 1.	Purchased office equipment from Mountain Equipment Co. for $108,000, paying $18,000 and issuing a series of ten 6% notes for $9,000 each, coming due at 30-day intervals.
Dec. 12.	Settled a product liability lawsuit with a customer for $66,000, payable in January. Emerald Bay accrued the loss in a litigation claims payable account.
Dec. 31.	Paid the amount due Mountain Equipment Co. on the first note in the series issued on December 1.

Required:

1. Journalize the transactions. If an amount box does not require an entry, leave it blank. Assume a 360-day year. If required, round to one decimal place. Don't round the intermediate calculations.

For a compound transaction, accounts should be listed largest to smallest.

Date	Account	Debit	Credit
Feb. 15	Inventory
	Accounts Payable - Hood Co.
Mar. 17	Accounts Payable - Hood Co.
	Notes Payable
May 16	Notes Payable
	Interest Expense
	Cash
June 15	Cash
	Notes Payable
July 21	Tools
	Interest Expense
	Notes Payable
Aug. 14	Notes Payable
	Interest Expense
	Notes Payable
	Cash
Oct. 13	Notes Payable
	Interest Expense
	Cash
Oct. 19	Notes Payable
	Cash
Dec. 1	Office Equipment
	Notes Payable
	Cash
Dec. 12	Litigation Loss
	Litigation Claims Payable
Dec. 31	Notes Payable
	Interest Expense
	Cash

2. Journalize the adjusting entry for each of the following accrued expenses at the end of the current year: (a) product warranty cost, $15,400; (b) interest on the nine remaining notes owed to Mountain Equipment Co.

Item	Account	Debit	Credit
a.
b.

Answer 1

Date	Account	Debit	Credit
Feb. 15	Inventory	$144,000
	Accounts Payable - Hood Co.		$144,000
Mar. 17	Accounts Payable - Hood Co.	$144,000
	Notes Payable		$144,000
16-May	Notes Payable	$144,000
	Interest Expense (144000*6%*60/360)	1440
	Cash		$145,440
15-Jun	Cash	$154,800
	Notes Payable		$154,800
21-Jul	Tools	$112,290
	Interest Expense (114000*6%*90/360)	1710
	Notes Payable		$114,000
Aug. 14	Notes Payable	$154,800
	Interest Expense (154800*7%*60/360)	1806
	Notes Payable		$154,800
	Cash		1806
Oct. 13	Notes Payable	$154,800
	Interest Expense (154800*10%*60/360)	2580
	Cash		$157,380
Oct. 19	Notes Payable	$114,000
	Cash		$114,000
Dec. 1	Office Equipment	108000
	Notes Payable		18000
	Cash		90000
Dec. 12	Litigation Loss	$66,000
	Litigation Claims Payable		$66,000
Dec. 31	Notes Payable	9000
	Interest Expense (9000*6%*30/360)	45
	Cash		9045
ans 2
Adj entries
a)	Product Warranty expenses	$15,400
	Product warranty liability payable		$15,400
b)	Interest Expense (81000*6%*30/360)	405
	Interest payable		405