Question

Following are selected transactions relating to Star Company during 2015:

2015

Nov 30:               Purchased merchandise inventory in the amount of $23,000, plus recoverable HST at 13%, on credit from Hudson Inc. Terms of credit are N/30.

Dec 11:               Borrowed $15,000.00 from ABC Bank by signing a 90 day, 8% note payable.

Dec 27:               Recorded merchandise sales on credit for $ 13,000 plus 13 % HST. Terms of credit are N30 and the cost of the merchandise sold was $ 5,750.

Other information:

Star estimates that 1 % of units sold will be returned and replaced under warranty from inventory, at a cost of $ 43.50 per unit. During all of 2015 Star sold 26,400 units.

Star estimated its income tax expense to be $ 21,000 for the current year ending December 31. The company has recorded 1/12 of this amount for each of the eleven months ending November 30. On December 15^th Star learns its actual income tax expense for the current year will be $ 20,600, payable in January 2016.

Required:

1. Prepare the journal entries to record the three transactions listed above.

2. Record the year-end adjusting entries for interest expense and estimated warranty expense. (Assume a year end of December 31, 2015).

3. Record the adjusting entry for income tax expense for the month of December.

4. Determine the maturity date and record the repayment of the note payable.

5. Record the replacement of 162 units under warranty in 2016 at $ 43.50 per unit replaced. Use a date of December 31, 2016

Calendar (Days per month):

Jan        31          May      31          Sep        30

Feb        28          Jun        30          Oct        31

Mar       31          Jul          31          Nov       30

Apr        30          Aug       31          Dec        31

Answer 1

Date	General transaction	Dr	Cr
11/30/2015	Purchase	23,000
	HST recoverable	2,990
	Accounts payable - Hudson Inc		25,990
	(Being purchase of merchandise on credit from Hudson)
12/11/2015	Bank	15,000
	Notes payable		15,000
	(Being borrowing from bank by way of notes payable for 90 days @ 8%)
12/27/2015	Accounts recoverable	14,690
	Sales		13,000
	HST payable		1,690
	(Being sales of merchandise on account)
12/27/2015	COGS	5,750
	Purchases		5,750
	(Being COGS accounted)
12/27/2015	Warranty expense	11,484
	warranty liability account		11,484
	(Being accrual for warranty of 1% on Sales)
12/31/2015	Income tax	1,350
	income tax payabe		1,350
	(Being income tax accrual entry for 2015 for the month of Dec, difference of estimated earlier & actual)
12/31/2015	Interest	69
	Notes payable		69
	(Being interest accrued for 21 days of Dec 15)
03/10/2016	Notes payable	15,000
	Interest	296
	Bank		15,296
	(Being interest and notes payable paid)
2016	Warranty liability account	7,047
	Inventory		7,047
	(Being replacement of 162 units under warranty)

Warranty computation
Units sold	26,400
Cost price	43.5
Total cost price	1,148,400
% of sales under warranty	11,484

Computation of interest
Notes	15,000
Interest p.a	1,200
Interest for 90 days	296
Interest for 21 days of dec	69