On January 1, 2010, the ledger of Painless Software Company contains the followi

ID: 2379250 • Letter: O

Question

On January 1, 2010, the ledger of Painless Software Company contains the following
liability accounts.
Accounts Payable $42,500
Sales Taxes Payable 5,800
Unearned Service Revenue 15,000
During January the following selected transactions occurred.
Jan. 1 Borrowed $30,000 in cash from Amsterdam Bank on a 4-month, 8%, $30,000 note.
5 Sold merchandise for cash totaling $10,400, which includes 4% sales taxes.
12 Provided services for customers who had made advance payments of $9,000. (Credit
Service Revenue.)
14 Paid state treasurer’s department for sales taxes collected in December 2009, $5,800.
20 Sold 900 units of a new product on credit at $52 per unit, plus 4% sales tax. This new
product is subject to a 1-year warranty.
25 Sold merchandise for cash totaling $18,720, which includes 4% sales taxes.
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and (2)
estimated warranty liability, assuming warranty costs are expected to equal 5% of sales of the
new product.
(c) Prepare the current liabilities section of the balance sheet at January 31, 2010. Assume no
change in accounts payable.

Explanation / Answer

Jan. 1 Borrowed $30,000 in cash from Amsterdam Bank on a 4-month, 8%, $30,000 note.

Debit: Cash 30,000

Credit: Notes payable 30,000

5 Sold merchandise for cash totaling $10,400, which includes 4% sales taxes.

Debit: Cash 10,400

Credit: Sales Revenue 10,000

Credit: Sales Tax Payable 400

12 Provided services for customers who had made advance payments of $9,000. (Credit
Service Revenue.)

Debit: Unearned Service Revenue 9,000

Credit: Service revenue 9,000

14 Paid state treasurer’s department for sales taxes collected in December 2009, $5,800.

Debit: Sale tax payable 5800

Credit: Cash 5800

20 Sold 900 units of a new product on credit at $52 per unit, plus 4% sales tax. This new
product is subject to a 1-year warranty.

Debit: Cash 48672

Credit: Sales revenue 46800

Credit: Sales tax payable 1872

25 Sold merchandise for cash totaling $18,720, which includes 4% sales taxes.
Instructions

Cash 18720

Debit: Sales Revenue 18000

Debit: Sales taxes payable 720

(b) Journalize the adjusting entries at January 31 for (1) the outstanding notes payable, and (2)
estimated warranty liability, assuming warranty costs are expected to equal 5% of sales of the
new product.

Debit: Interest Expense 200

Credit: Interest Payable 200

Debit: Warranty Expense 2340

Credit: Estimated Warranty Liability 2340

(c) Prepare the current liabilities section of the balance sheet at January 31, 2010. Assume no
change in accounts payable.

Accounts Payable

42,500

Sales Taxes Payable

2,992

Unearned Service Revenue

6,000

Notes Payable

30,000

Interest payable

200

Estimated warranty liability

2,340

Total Current Liaiblities

84,032