Question

P 13–4 Various liabilities LO13–1 through @L013-4 Q The unadjusted trial balance of the Manufacturing Equitable at December 31, 2021, the end of its fiscal year, included the following account balances. Manufacturing's 2021 financial statements were issued on April 1, 2022. Accounts receivable Accounts payable 10% notes, payable to bank Mortgage note payable $ 92,500 35,000 600,000 1,200,000 Other information: a. The bank notes, issued August 1, 2021, are due on July 31, 2022, and pay interest at a rate of 10%, payable at maturity. b. The mortgage note is due on March 1, 2022. Interest at 9% has been paid up to December 31 (assume 9% is a realistic rate). Manufacturing intended at December 31, 2021, to refinance the note on its due date with a new 10-year mortgage note. In fact, on March 1, Manufacturing paid $250,000 in cash on the principal balance and refinanced the remaining $950,000. c. Included in the accounts receivable balance at December 31, 2021, were two subsidiary accounts that had been overpaid and had credit balances totaling $18,000. The accounts were of two major customers who were expected to order more merchandise from Manufacturing and apply the overpayments to those future purchases. d. On November 1, 2021, Manufacturing rented a portion of its factory to a tenant for $30,000 per year, payable in advance. The payment for the 12 months ended October 31, 2022, was received as required and was credited to rent revenue. Required: 1. Prepare any necessary adjusting journal entries at December 31, 2021, pertaining to each item of other information (a-d). 2. Prepare the current and long-term liability sections of the December 31, 2021, balance sheet.

Answer 1

Answer-1(a):

No.	Account Name	Debit	Credit
a	Interest expense ($600,000 × 10% × 5/12)	$      25,000
	Interest payable		$       25,000

Answer-1(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 $250,000 in its current liability section, and the remaining $950,000 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 $950,000 after the end of 2021, but before the 2021 financial statements are issued.

Answer-1(c):

No.	Account Name	Debit	Credit
c	Account receivable	$      18,000
	Advance from customers		$       18,000

Answer-1(d):

No.	Account Name	Debit	Credit
d	Rent revenue ($30,000 × 10/12)	$      25,000
	Unearned rent revenue		$       25,000

Answer-2:

Current liabilities: Accounts payable Notes payable Current portion of long-term debt Interest payable Advances from customers Unearned rent revenue Total current liabilities Long-term liabilities: Mortgage note payable $ 35,000 600,000 250,000 25,000 18,000 25,000 $953.000 $950,000