Question

Liability Transactions

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

Feb. 15.	Purchased merchandise on account from Kirkwood Co., $144,000, terms n/30.
Mar. 17.	Issued a 60-day, 7% note for $144,000 to Kirkwood Co., on account.
May 16.	Paid Kirkwood Co. the amount owed on the note of March 17.
June 15.	Borrowed $177,600 from Triple Creek Bank, issuing a 60-day, 8% note.
July 21.	Purchased tools by issuing a $102,000, 90-day note to Poulin Co., which discounted the note at the rate of 7%.
Aug. 14.	Paid Triple Creek Bank the interest due on the note of June 15 and renewed the loan by issuing a new 60-day, 10% note for $177,600. (Journalize both the debit and credit to the notes payable account.)
Oct. 13.	Paid Triple Creek Bank the amount due on the note of August 14.
Oct. 19.	Paid Poulin Co. the amount due on the note of July 21.
Dec. 1.	Purchased office equipment from Greenwood Co. for $96,000, paying $16,000 cash and issuing a series of ten 6% notes for $8,000 each, coming due at 30-day intervals.
Dec. 12.	Settled a product liability lawsuit with a customer for $75,000, payable in January. Accrued the loss in a litigation claims payable account.
Dec. 31.	Paid the amount due to Greenwood 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-Kirkwood Co.
Mar. 17	Accounts Payable-Kirkwood 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, $16,600; (b) interest on the nine remaining notes owed to Greenwood Co.

Item	Account	Debit	Credit
a.	Product Warranty Expense
	Product Warranty Payable
b.	Interest Expense
	Interest Payable

Answer 1

SOLUTION

1.

Date	Accounts titles and Explanation	Debit ($)	Credit ($)
Feb.15	Inventory	144,000
	Accounts Payable-Kirkwood Co.		144,000
Mar.17	Accounts Payable-Kirkwood Co.	144,000
	Notes Payable		144,000
May 16	Notes Payable	144,000
	Interest Expense (144,000*7%*60/360)	1,680
	Cash		145,680
June 15	Cash	177,600
	Notes Payable		177,600
July 21	Tools	100,215
	Interest Expense (102,000*7%*90/360)	1,785
	Notes Payable		102,000
Aug. 14	Notes Payable	177,600
	Interest Expense (177,600*8%*60/360)	2,368
	Notes Payable		177,600
	Cash		2,368
Oct. 13	Notes Payable	177,600
	Interest Expense (177,600*10%*60/360)	2,960
	Cash		180,560
Oct. 19	Notes Payable	102,000
	Cash		102,000
Dec. 1	Office Equipment	96,000
	Notes Payable		80,000
	Cash		16,000
Dec. 12	Litigation Loss	75,000
	Litigation Claims Payable		75,000
Dec. 31	Notes Payable	8,000
	Interest Expense (8,000*6%*30/360)	40
	Cash		8,040

2.

S.No.	Accounts titles and Explanation	Debit ($)	Credit ($)
a.	Product Warranty Expense	16,600
	Product Warranty Payable		16,600
b.	Interest Expense	360
	Interest Payable (8,000*6%*30/360*9)		360