Question

P13-1 (L01) GROUPWORK (Current Liability Entries and Adjustments) Described below are certain transactions of Edwardson Corporation. The company uses the periodic inventory system.

 1. On February 2, the corporation purchased goods from Martin Company for $70,000 subject to cash discount terms of 2/10, 1/30. Purchases and accounts payable are recorded by the corporation at net amounts after cash discounts. The invoice was paid on February 26.

 2. On April 1, the corporation bought a truck for $50,000 from General Motors Company, paying $4,000 in cash and signing a 1-year, 12% note for the balance of the purchase price.

 3. On May 1, the corporation borrowed $83,000 from Chicago National Bank by signing a $92,000 zero-interest-bearing note due 1 year from May 1.

 4. On August 1, the board of directors declared a $300,000 cash dividend that was payable on September 10 to stockholders of record on August 31. 

Instructions 

(a) Make all the journal entries necessary to record the transactions above using appropriate dates 

(b) Edwardson Corporation's year-end is December 31. Assuming that no adjusting entries relative to the transactions above have been recorded, prepare any adjusting journal entries concerning interest that are necessary to present fair financial statements at December 31. Assume straight-line amortization of discounts.

Answer 1

Case 1 February 2 Purchases A/c Dr ($ 70000*98%) 68600 To Martin company 68600 February 26 Martin Company A/c Dr 68600 Discount loss A/c Dr 1400 To Bank 70000 Case 2 April 1 Truck A/c Dr 50000 To Cash 4000 To Notes payable 46000 31st December Interest expenses A/c Dr (46000*12%*9/12) 4140 To Interest payable 4140 Case 3 May 1 Cash A/c Dr 83000 To Discount on borrowing 9000 To note payable 92000

Case 4 August 1 Dividend A/c Dr 300000 To Dividend Payable 300000 September 10 Dividend payable A/c 300000 To cash 300000

Answer 2

Answer 3

Concepts and reason

Merchandise inventory: Merchandise are the goods procured by a trader, a wholesaler, or a merchant from suppliers with an intention to resell those goods for a higher price. This inventory is recorded as current asset on the balance sheet because it is planned to sell within a year.

Periodic inventory system: This is a system of accounting for inventory, where the quantity of inventory is recorded on a periodic basis. The up-to-date records are not maintained either for inventory or cost of goods sold. The figure for inventory is determined only at the end of financial year or the balance sheet date. This physical count is the amount that appears in the records. This physical count is called physical inventory.

Fundamentals

Transaction: A transaction in business refers to any events that affect the financial position of the business that can be reliably measured in monetary terms. A business transaction affects the accounting equation.

Journal entry: Journal is the book of original entry, where all the monetary transactions are recorded date-wise with the debit and credit entry. The record of business transactions in a chronological order in the journal is referred to as journal entry. Journal entry is represented in the form of a table with the Date, Accounts Titles and Explanation, Reference Number, Debit, and Credit columns.

Rules of debit and credit: The category of accounts determines how the increases and decreases are recorded in the said account. In other words, the account category determines the rule of debit and credit for that particular account. The following are the rules of debit and credit:

1.Debit increases all asset and expenses accounts. Debit decreases all liabilities, revenues and stockholders’ equity account.

2.Credit increases all liabilities, revenues and stockholders’ equity account. Credit decreases all asset and expense accounts.

Normal balance of an account: Normal balance of an account refers to that side of the account where the increase in the account is recorded. Normal balance means, the usual or natural balance of a particular account. All assets accounts have normal debit balances and all liabilities accounts have normal credit balances. Revenue/Income account normally have credit balances, expense account normally have debit balances.

Merchandising operations: Merchandising operations, which are exchange of goods, are performed as a primary source of revenue. These include purchase and sale of goods, or merchandising inventory.

Merchandise return: Merchandise return is a situation where a buyer returns the goods purchased from a seller. This generally results in receiving a credit for the goods returned.

Meaning of “2/10, net 30”: It denotes the term of trade and net period in the sales invoice. It means the buyer can avail a 2% discount for paying the bill within 10 days, but in any case the buyer must pay the bill within 30 days.

Accounting Equation: This is a mathematical equation, which represents the association between assets, liabilities and stockholders’ equity. This is also called as balance sheet equation. It is represented as follows:

Asset: The source, which is possessed or controlled to generate income in the future, is known as an asset. This is a permanent account because these accounts are carried forward from one financial year to the other.

Liability: Liability is an agreement made by a company to pay a certain amount for the goods or services received by the company in the past. This is a permanent account because these accounts are carried forward from one financial year to the other.

Stockholders’ equity: Stockholders’ equity refers to the shareholders claims on the assets or resources of a company, and so known as net assets of the company, which is assets minus liabilities. It is also known as Owner’s equity.

Revenue: Revenue is the total income earned by an organization by selling goods or rendering services.

Expense: Expense is the cost borne by a company to produce and sell the goods and services to the customers.

The format of journal entry is shown below:

Procedure to be followed to prepare journal entries:

• Increase in assets, increase in expenses, and decrease in liabilities should be debited.

• Decrease in assets, increase in revenue, and increase in liabilities should be credited.

Prepare journal entry on 2^nd February to record the purchase of goods on credit.

Working note:

Calculate the amount of purchases.

Prepare journal entry on 26^th February to record the amount paid for purchases after discount period.

Prepare journal entry on 1^st April to record the purchase of truck by paying down payment and balance on note.

Working note:

Calculate the annual interest on truck note:

Note:

Prepare journal entry on 1^st May to record the borrowed amount form C National bank by signing note.

Working note:

Calculate the annual interest on C national bank note:

Note:

Prepare journal entry on 1^st August to record the declaration of dividend by BOD.

Prepare journal entry on 10^th September to record the payment of dividend.

Ans: