Question

The following items were selected from among the transactions completed by O’Donnel Co. during the current year:

Jan. 10. Purchased merchandise on account from Laine Co., $414,000, terms n/30.
Feb. 9. Issued a 30-day, 4% note for $414,000 to Laine Co., on account.
Mar. 11. Paid Laine Co. the amount owed on the note of February 9.
May 1. Borrowed $180,000 from Tabata Bank, issuing a 45-day, 4% note.
June 1. Purchased tools by issuing a $228,000, 60-day note to Gibala Co., which discounted the note at the rate of 6%.
June 15. Paid Tabata Bank the interest due on the note of May 1 and renewed the loan by issuing a new 45-day, 6.5% note for $180,000. (Journalize both the debit and credit to the notes payable account.)
July 30. Paid Tabata Bank the amount due on the note of June 15.
July 30. Paid Gibala Co. the amount due on the note of June 1.
Dec. 1. Purchased office equipment from Warick Co. for $520,000, paying $90,000 and issuing a series of ten 4% notes for $43,000 each, coming due at 30-day intervals.
Dec 15. Settled a product liability lawsuit with a customer for 315,000, payable in January. O’Donnel accrued the loss in a litigation claims payable account.
Dec 31. Paid the amount due Warick Co. on the first note in the series issued on December 1.
Required:
1. Journalize the transactions. Refer to the Chart of Accounts for exact wording of account titles. Assume a 360-day year. Round your answers to the nearest dollar.
2. Journalize the adjusting entry for each of the following accrued expenses at the end of the current year:
A. Product warranty cost, $26,500.
B. Interest on the nine remaining notes owed to Warick Co. Refer to the Chart of Accounts for exact wording of account titles. Assume a 360-day year. Round your answers to the nearest dollar.

Answer 1

	Answer to A
Date	Account Title & Explanation	Debit	Credit
Jan.10	Inventory	414,000
	Accounts Payable-Laine Co.		414,000
Feb.9	Accounts Payable-Laine Co.	414,000
	4% Notes Payable		414,000
Mar-11	4% Notes Payable	414,000
	Interest Expense ($414000*30/360*4%)	1380
	Cash		415,380
May-01	Cash	180,000
	4.% Notes Payable		180,000
Jun-01	Tools	225,720
	Interest Expense ($228000*60/360*6%)	2,280
	6% Notes Payable		228,000
Jun-15	4.% Notes Payable	180,000
	Interest Expense ($180000*45/360*4%)	900
	6.5% Notes Payable		180,000
	Cash		900
Jul-30	6.5% Notes Payable	180,000
	Interest Expense ($180000*45/360*6.5%)	1462.5
	Cash		181,463
Jul-30	6% Notes Payable	228,000
	Cash		228,000
Dec.1	Office Equipment	520,000
	4% Notes Payable		430,000
	Cash		90,000
Dec-15	Litigation Loss	315,000
	Litigation Claims Payable		315,000
Dec.31	4% Notes payable	43,000
	Interest Expense ($43000*30/360*4%)	143.33
	Cash		43,143.33
	Answet to B
Date	Account Title & Explanation	Debit	Credit
	Product warranty expense	26,500
	Product warranty payable		26,500
	Interest Expense	1,290
	Interest Payable ($387000*30/360*4%)		1,290

Answer 2

Date	Particulars	Debit	Credit
10-Jan	Purchases	$414,000
	Accounts Payable		$414,000
	Being purchase of merchandise on account
9-Feb	Accounts Payable	414,000
	Notes Payable		414,000
	Being Notes Payable issued to replace the A/P account
11-Mar	Notes Payable	414,000
	Interest Expense	1,380
	($414,000 x 4% x 1/12 mos.)
	Cash		415,380
	Being the payment of Notes Payable and interest thereon
1-May	Cash	180,000
	Notes Payable		180,000
	Being the loans borrowed from the bank
1-Jun	Tools	214,320
	Interest Expense (on discounting Notes)	13,680
	($228,000 x 6%)
	Notes Payable		228,000
	Being Tools purchased by notes discounted
15-Jun	Notes Payable	180,000
	Interest Expense	1463
	($180,000 x 6.5% x 1.5/12)
	Notes Payable		180000
	Cash		1,463
	Being payment of interest and new Notes Payable)
30-Jul	Notes Payable	180000
	Interest expense	1463
	Cash		181463
	(Being Notes payable paid off along with interest)
30-Jul	Notes Payable	228,000
	Cash		228,000
	Being the payment of Notes Payable
1-Dec	Equipment	520,000
	Cash		90,000
	Notes Payable		430,000
	Being the purchase of Equipment
15-Dec	Loss in Litigations	315,000
	Litigation Claims Payable		315,000
	Being a contingent account for Loss in Lawsuit set up
31-Dec	Notes Payable	43,000
	Interest expense (43000*4/100*1/12)	143
	Cash		43,143
	Being the payment of first series of Notes Payable issued

2.

31-Dec	Warranty Expense a/c Dr	26500
	Waranty Liability a/c		26500
	Being an adjusting entry for the waranty liability made for

3.

31-Dec	Accrued Interest Expense	1,290
	($430,000 - $43,000 = $387,000 x 4% x 1/12)
	Interest Payable		1,290
	Being an adjusting entry on the Notes Payable