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 $ 102,500 Accounts payable 39,400 Bank notes payable 614,000 Mortgage note payable 1,294,000 Other information: The bank notes, issued August 1, 2018, are due on July 31, 2019, and pay interest at a rate of 12%, payable at maturity. 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 $272,000 in cash on the principal balance and refinanced the remaining $1,022,000. Included in the accounts receivable balance at December 31, 2018, were two subsidiary accounts that had been overpaid and had credit balances totaling $19,750. The accounts were of two major customers who were expected to order more merchandise from Manufacturing and apply the overpayments to those future purchases. On November 1, 2018, Manufacturing rented a portion of its factory to a tenant for $33,600 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

Part 1	a	Interest expense [(12% x 614,000) x 5/12]	$              30,700
		Interest payable		$        30,700
	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 $272,000 in its current liability section, and the remaining $1,022,000 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 $1,022,000 after the end of 2018, but before the 2018 financial statements are issued.
	c	Accounts receivable	$              19,750
		Advances from customers		$        19,750
	d	Rent revenue (10/12 x 33,600)	$              28,000
		Unearned rent revenue		$        28,000
	Part 2	Current liabilities:
		Accounts payable	$              39,400
		Notes payable	614,000
		Current portion of long-term debt	272,000
		Interest payable	30,700
		Advances from customers	19,750
		Unearned rent revenue	28,000
		Total current liabilities	$        1,003,850
		Long-term liabilities:
		Mortgage note payable	$        1,022,000