Liability Transactions The following items were selected from among the transact

Question

Liability Transactions

The following items were selected from among the transactions completed by Emerald Bay Stores Co. during the current year:

Required:

1. Journalize the transactions. If an amount box does not require an entry, leave it blank. Assume a 360-day year. If required, round to one decimal place. Don't round the intermediate calculations.
2. Journalize the adjusting entry for each of the following accrued expenses at the end of the current year: (a) product warranty cost, $18,300; (b) interest on the nine remaining notes owed to Mountain Equipment Co.

Feb. 15. Purchased merchandise on account from Hood Co., $144,000, terms n/30. Mar. 17. Issued a 60-day, 7% note for $144,000 to Hood Co., on account. May 16. Paid Hood Co. the amount owed on the note of March 17. June 15. Borrowed $157,200 from Acme Bank, issuing a 60-day, 8% note. July 21. Purchased tools by issuing a $81,000, 90-day note to Columbia Supply Co., which discounted the note at the rate of 8%. Aug. 14. Paid Acme Bank the interest due on the note of June 15 and renewed the loan by issuing a new 60-day, 10% note for $157,200. (Journalize both the debit and credit to the notes payable account.) Oct. 13. Paid Acme Bank the amount due on the note of August 14. Oct. 19. Paid Columbia Supply Co. the amount due on the note of July 21. Dec. 1. Purchased office equipment from Mountain Equipment Co. for $144,000, paying $24,000 and issuing a series of ten 6% notes for $12,000 each, coming due at 30-day intervals. Dec. 12. Settled a product liability lawsuit with a customer for $80,000, payable in January. Emerald Bay accrued the loss in a litigation claims payable account. Dec. 31. Paid the amount due Mountain Equipment Co. on the first note in the series issued on December 1.

Explanation / Answer

Solution:

Part 1--- Journal Entries

Date

Account Titles and Explanation

Debit

Credit

Feb.15

Merchandise Inventory

$144,000

   Accounts Payable - Hood Co.

$144,000

Mar.17

Accounts Payable - Hood Co.

$144,000

Notes Payable - Hood Co.

$144,000

May.16

Notes Payable - Hood Co.

$144,000

Interest Expense (144,000*7%*60/360)

$1,680

Cash

$145,680

June.15

Cash

$157,200

Notes Payable - Acme Bank

$157,200

July.21

Tools A/c

$79,380

Discount on Notes Payable (81,000*90/360*8%)

$1,620

Notes Payable - Columbia

$81,000

Aug.14

Interest Expense (157,200*8%*60/360)

$2,096

Cash

$2,096

Aug.14

Notes Payable - Acme Bank

$157,200

Notes Payable - Acme Bank

$157,200

Oct.13

Notes Payable - Acme Bank

$157,200

Interest Expense (157,200*10%*60/360)

$2,620

Cash

$159,820

Oct.19

Notes Payable - Columbia

$81,000

Cash

$81,000

Oct.19

Interest Expense

$1,620

Discount on Notes Payable

$1,620

Dec.1

Office Equipment

$144,000

Cash

$24,000

6% Series Notes Payable

$120,000

Dec.12

Litigation Expense

$80,000

Litigation Claims Payable Account

$80,000

Dec.31

6% Series Notes Payable - First

$12,000

Interest Expense ($12,000*6%*30/360)

$60

Cash

$12,060

Part 2 –

Date

Account Titles and Explanation

Debit

Credit

Dec.31

Warranty Expense

$18,300

Warranty Liabilities

$18,300

Dec.31

Interest Expense (108,000*6%*30/360)

$540

Interest Payable

$540

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Date

Account Titles and Explanation

Debit

Credit

Feb.15

Merchandise Inventory

$144,000

   Accounts Payable - Hood Co.

$144,000

Mar.17

Accounts Payable - Hood Co.

$144,000

Notes Payable - Hood Co.

$144,000

May.16

Notes Payable - Hood Co.

$144,000

Interest Expense (144,000*7%*60/360)

$1,680

Cash

$145,680

June.15

Cash

$157,200

Notes Payable - Acme Bank

$157,200

July.21

Tools A/c

$79,380

Discount on Notes Payable (81,000*90/360*8%)

$1,620

Notes Payable - Columbia

$81,000

Aug.14

Interest Expense (157,200*8%*60/360)

$2,096

Cash

$2,096

Aug.14

Notes Payable - Acme Bank

$157,200

Notes Payable - Acme Bank

$157,200

Oct.13

Notes Payable - Acme Bank

$157,200

Interest Expense (157,200*10%*60/360)

$2,620

Cash

$159,820

Oct.19

Notes Payable - Columbia

$81,000

Cash

$81,000

Oct.19

Interest Expense

$1,620

Discount on Notes Payable

$1,620

Dec.1

Office Equipment

$144,000

Cash

$24,000

6% Series Notes Payable

$120,000

Dec.12

Litigation Expense

$80,000

Litigation Claims Payable Account

$80,000

Dec.31

6% Series Notes Payable - First

$12,000

Interest Expense ($12,000*6%*30/360)

$60

Cash

$12,060

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