Question

Assume the year runs from January 1 to December 31 for the Year 2018. On May 1, Company DEF (“The Company”) purchased inventories costing $49,000; the Company paid $29,000 in cash and giving a one-year, 9% note for the balance; accrual of interest expense.  On August 1, The Company received $6,000 cash for legal services to be performed evenly throughout the six months period (starting on August 1); and the Company started rendering the legal services on August 1. On November 1, The Company paid $5,400 in cash for one year of the rent in advance.

Prepare the journal entries to record the above transactions on May 1, August 1, and November 1 in box .

Prepare the adjusting entries at 31 December 2018 related to the above transactions in box . Assume straight-line amortization method is applied.

Prepare the journal entries to record the payment of the note on the maturity date in box .

Indicate the manner in which the above transactions should be reflected in the Current Liabilities section of The Company's Statement of Financial Position at 31 December 2018 in box

Answer 1

Answer :

Journal Entries

Date	Account Titles	Debit	Credit
May-01	Inventory	$       49,000
	Cash		$ 29,000
	Notes Payable		$ 20,000
(Purchase of inventory)
Aug-01	Cash	$         6,000
	Unearned Service Revenue		$    6,000
(Cash received for services to be rendered)
Nov-01	Prepaid Rent	$         5,400
	Cash		$    5,400
(Rent paid in advance for one year)

Adjusting Entries

Date	Account Titles	Debit	Credit	Explanation
Dec-31	Interest Expense	$         1,200		=20000*9%*8/12
	Interest Payable		$    1,200
(Interest accrued on note for 8 months)
Dec-31	Unearned Service Revenue	$         5,000		=6000*5/6
	Service Revenue		$    5,000
(Service Revenue recognized for services rendered)
Dec-31	Rent Expense	$             900		=5400/12*2
	Prepaid Rent		$        900
(Rent expense recorded)

Maturity date

Date	Account Titles	Debit	Credit	Explanation
Apr-30	Notes Payable	$       20,000
	Interest Payable	$         1,200
	Interest Expense			=20000*9%*4/12
	Cash		$ 21,200
(Note paid on maturity)

Current Liabilities
Unearned Service Revenue	$         1,000
Notes Payable	$       20,000
Interest Payable	$         1,200
Total Current Liabilities	$       22,200