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	$	99,000
Accounts payable		35,400
Bank notes payable		698,000
Mortgage note payable		1,315,000

Other information:

1. The bank notes, issued August 1, 2018, are due on July 31, 2019, and pay interest at a rate of 12%, payable at maturity.
2. 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 $297,000 in cash on the principal balance and refinanced the remaining $1,018,000.
3. Included in the accounts receivable balance at December 31, 2018, were two subsidiary accounts that had been overpaid and had credit balances totaling $18,650. The accounts were of two major customers who were expected to order more merchandise from Manufacturing and apply the overpayments to those future purchases.
4. On November 1, 2018, Manufacturing rented a portion of its factory to a tenant for $36,000 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.
  

Answer 1

1: Prepare any necessary adjusting journal entries at December 31, 2018, pertaining to each item of information (a – d)

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.

Account Title	Debit	Credit
Interest expense[(12% x 698000) x 5/12]	34900
Interest payable		34900

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 $297,000 in cash on the principal balance and refinanced the remaining $1,018,000.

No adjusting entry is required.

Explanation:

The interest has been paid up to December 31. Given the information, Manufacturing would include $297000 in its current liability section, and the remaining $1018000 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 $1018000 after the end of 2018, but before the 2018 financial statements are issued.

c. Included in the accounts receivable balance at December 31, 2018, were two subsidiary accounts that had been overpaid and had credit balances totaling $18,650. The accounts were of two major customers who were expected to order more merchandise from Manufacturing and apply the overpayments to those future purchases.

Account Title	Debit	Credit
Accounts receivable	18650
Advances from customers		18650

d. On November 1, 2018, Manufacturing rented a portion of its factory to a tenant for $36,000 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.

Account Title	Debit	Credit
Rent revenue (10/12 x 36000)	30000
Unearned rent revenue		30000

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

Current liabilities:
Accounts payable	35400
Notes payable	698000
Current portion of long-term debt	297000
Interest payable	34900
Advances from customers	18650
Unearned rent revenue	30000
Total current liabilities	1113950
Long-term liabilities:
Mortgage note payable	1018000