Question

Various liabilities

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	$    92,500
Accounts payable	35,000
Bank notes payable	600,000
Mortgage note payable	1,200,000

Other information:

a.  The bank notes, issued August 1, 2016, are due on July 31, 2017, and pay interest at a rate of 10%, payable at maturity.

b.  The mortgage note is due on March 1, 2017. Interest at 9% has been paid up to December 31 (assume 9% 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 $250,000 in cash on the principal balance and refinanced the remaining $950,000.

c.  Included in the accounts receivable balance at December 31, 2016, were two subsidiary accounts that had been overpaid and had credit balances totaling $18,000. 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 $30,000 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).

2.  Prepare the current and long-term liability sections of the December 31, 2016, balance sheet.

Answer 1

1. Necessary adjusting journal entries at December 31, 2016
a.	Interest expenses	$25,000
	Interest payable		$25,000
	(To record the interest expense on Bank notes payable)
	Interest expense = $600000 x 10% x 5/12 = $25000
b.	No adjusting entry is required for mortgage note
	as interest has been paid upto December 31, 2016
c.	Accounts receivable	$18,000
	Advances from Customer		$18,000
	(To adjust advance received included in accounts receivable)
d.	Rent revenue	$25,000
	Unearned rent revenue		$25,000
	(To adjust rent revenue received in advance)
	Unearned rent revenue = $30000 x 10/12 = $25000
2. Current and long term liability section of the December 31, 2016 Balance sheet
	Current Liabilities
	Accounts Payable	$35,000
	Notes payable	$600,000
	Current portion of Long term Debt	$250,000
	Interest Payable	$25,000
	Advance from Customers	$18,000
	Unearned rent revenue	$25,000
	Total Current Liabilities	$953,000
	Long term Liabilities
	Mortgage notes payable	$950,000
As the information provided, Manufacturing paid $250000 in cash on March 1, 2017 thus this amount will be included in the current liabilities under the head current portion of long term debt and the remaining will be long term debt.