Question

Magnesita has the following transactions related to liabilities in December 2017 and January 2018. Magnesita’s fiscal year end is December 31. Its financial statements are issued in April. 2017 Dec 1 Negotiated a revolving credit agreement with Deutsche Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $20 million at the Bank’s prime rate. Dec 15 Arranged a three-month bank loan of $5 million with Deutsche Bank under the line of credit agreement. Interest at the prime rate of 10% was payable at maturity. Dec 20 Received $200,000 from Nucor Corporation towards the purchase of a $1.2 million order to be delivered on January 15. Dec 24 Sold $750,000 worth of bricks on account to US Steel. The state sales tax is 5% and local sales tax is 2%. Dec 24 The bricks carry a one-year warranty. Based on past experience, Magnesita estimates that warranty costs approximate 1% of sales. Dec 25 Received $12,000 refundable deposit from US Steel relating to containers used to transport bricks. Dec 31 Record any necessary adjusting entry(s) 2018 (Continues on next page) Jan 6 Half of the containers (from Dec 24) were returned. Jan 8 Magnesita incurred warranty costs of $12,000 related to the brick sales from Dec 24. Jan 27 Magnesita determined that the remaining containers (from Dec 24) will not be returned. The original cost of the containers to Magnesita was $4,000.

Answer 1

	Journal Entries for the transactions
Date	Description	Debit	Credit
15-Dec	Cash	$5,000,000
	Bank Loan		$5,000,000
	(To record three months bank loan under line of credit arrangement)
20-Dec	Cash	$200,000
	Unearned Revenue		$200,000
	(To record advance payment for order to be delivered on Jan 15)
24-Dec	Accounts receivable	$802,500
	Sales Revenue		$750,000
	State sales tax payable		$37,500
	Local sales tax payable		$15,000
	(To record sale on account to US steel)
24-Dec	Warranty expenses	$7,500
	Warranty liability payable		$7,500
	(To record 1% warranty cost on sales)
25-Dec	Cash	$12,000
	Refundable Security Deposit		$12,000
	(To record refundable Security deposit for containers)
	Adjusting Journal Entries
Date	Description	Debit	Credit
31-Dec	Interest expense	$21,917.81
	Interest payable		$21,917.81
	(To record interest payable on bank loan for 16 days)
	$5000000 x 10% x 16/365 days = $21917.81
	Journal entries for the month of Jan
Date	Description	Debit	Credit
6-Jan	Refundable Security Deposit	$6,000
	Cash		$6,000
	(To record half of the security deposit refunded on retun of half of the containers)
8-Jan	Warranty expense	$4,500
	Warranty liability payable	$7,500
	Cash		$12,000
	(To record warranty cost incurred)
27-Jan	Refundable security deposit	$6,000
	Gain on sale of containers		$2,000
	Containers		$4,000
	(To record gain on containers not returned by US steel)