Question

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	$	95,750
Accounts payable		37,600
Bank notes payable		667,000
Mortgage note payable		1,442,000

Other information:

The bank notes, issued August 1, 2018, are due on July 31, 2019, and pay interest at a rate of 12%, payable at maturity.

The mortgage note is due on March 1, 2019. Interest at 11% has been paid up to December 31 (assume 11% 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 $442,000 in cash on the principal balance and refinanced the remaining $1,000,000.

Included in the accounts receivable balance at December 31, 2018, were two subsidiary accounts that had been overpaid and had credit balances totaling $19,050. The accounts were of two major customers who were expected to order more merchandise from Manufacturing and apply the overpayments to those future purchases.

On November 1, 2018, Manufacturing rented a portion of its factory to a tenant for $26,400 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.
  

Requirement 1:

a) Record the bank notes, issued August 1, 2018, are due on July 31, 2019, and pay interest at a rate of 12%, payable at maturity.

b) Record the mortgage note is due on March 1, 2019. Interest at 11% has been paid up to December 31 (assume 11% 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 $442,000 in cash on the principal balance and refinanced the remaining $1,000,000.

c) Record included in the accounts receivable balance at December 31, 2018, were two subsidiary accounts that had been overpaid and had credit balances totaling $19,050. 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)

Record on November 1, 2018, Manufacturing rented a portion of its factory to a tenant for $26,400 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.

Requirement 2:

Prepare the current and long-term liability sections of the December 31, 2018, balance sheet.

Balance Sheet (partial)

At December 31, 2018

Current Liabilities:

Total Current Liabilities:

Long- Term Liabilities:

Answer 1

1.

Transaction	General Journal	Debit	Credit
a.	Interest expense ($667000 x 12% x 5/12)	33350
	Interest payable		33350
	(To record interest accrued on bank notes payable)
b.	No journal entry required
c.	Accounts receivable	19050
	Advances from customers		19050
	(To record advances from customers)
d.	Rent revenue ($26400 x 10/12)	22000
	Unearned rent revenue		22000
	(To record unearned rent revenue)

2.

Manufacturing Equitable
Balance Sheet (partial)
At December 31, 2018
Current liabilities:
Accounts payable	37600
Bank notes payable	667000
Mortgage note payable (current portion)	442000
Interest payable	33350
Advances from customers	19050
Unearned rent revenue	22000
Total current liabilities	1221000
Long-term liabilities:
Mortgage note payable	1000000
Total liabilities	2221000