Question

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

Accounts receivable $ 95250

Accounts payable 42800

Bank notes payable 601000

Mortgage note payable 1,490,00

Other information

a. 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.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 $480,000 in cash on the principal balance and refinanced the remaining $1,010,000.

c.Included in the accounts receivable balance at December 31, 2018, were two subsidiary accounts that had been overpaid and had credit balances totaling $19350 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, 2018, Manufacturing rented a portion of its factory to a tenant for $25200 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). (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) Journal entry worksheet: 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 $480,000 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 $19,350. 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 $25,200 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.

(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

Part 1
(a)	Interest expense [(12% x 601,000) x 5/12]	30050
	Interest payable		30050
(b)	No adjusting entry is required. The reason is that the interest has been paid up to December 31.
	Given the information, Manufacturing would include $480,000 in its current liability section, and the remaining $1,010,000 in the long-term liability section. The reason is that Manufacturing has (1) the intent to refinance; and (2) demonstrated the ability to refinance in the amount of $1,010,000 after the end of 2018, but before the 2018 financial statements are issued.
(c )	Accounts receivable	19350
	Advances from customers		19350
(d)	Rent revenue (10/12 x 25,200)	21000
	Unearned rent revenue		21000
Part 2	Balance Sheet (partial)
	At December 31, 2018
	Current liabilities:
	Accounts payable	$              42,800
	Notes payable	601,000
	Current portion of long-term debt	480,000
	Interest payable	30,050
	Advances from customers	19,350
	Unearned rent revenue	21,000
	Total current liabilities	$        1,194,200
	Long-term liabilities:
	Mortgage note payable	$        1,010,000