27th Edition
WARREN + 5 others
ISBN: 9781337272094




27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Liability transactions

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., $240,000, terms n/30.
Feb. 9. Issued a 30-day, 4% note for $240,000 to Laine Co., on account.
Mar. 11.  Paid Laine Co. the amount owed on the note of February 9.
May 1. Borrowed $160,000 from Tabata Bank, issuing a 45-day, 5% note.
June 1. Purchased tools by issuing a $180,000. 60-day note to Gibala Co., which discounted the note at the rate of 5%
15. Paid Tabata Bank the interest due on the note of May 1 and renewed the loan by issuing a new 45-day, 7% note for $160,000. (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.
30. Paid Gibala Co. the amount due on the note of June 1.
Dec. 1. Purchased office equipment from Warick Co. for $400,000, paying $100,000 and issuing a series of ten 5% notes for $30,000 each, coming due at 30-day intervals.
15. Settled a product liability lawsuit with a customer for $260,000, payable in January. O’Donnel accrued the loss in a litigation claims payable account.
31. Paid the amount due Warick Co. on the first note in the series issued on December 1.


  1. 1. Journalize the transactions.
  2. 2. Journalize the adjusting entry for each of the following accrued expenses at the end of' the current year:

    a    Product warranty cost, $23,000.

    b    Interest on the nine remaining notes owed to Warick Co.


To determine

Liabilities: Liabilities are debt and obligations of a business. These are the claims against the resources that a business owes to outsiders of the company. Liabilities may be Current liabilities, and Long-term liabilities.  Examples: Creditors, Bills payable, Bank overdraft, Salaries and wages payable, and Notes payable.

To journalize: The liabilities transactions.


Working notes:

Calculate interest expense for 30 days on notes.

Interestexpense=Principalamount×Rateof interest×Time=$240,000 ×4% ×30360=$800 (1)

Calculate interest expense for discounted notes.

Interestexpense=Principalamount×Rateof interest×Time=$180,000 ×5% ×60360=$1,500 (2)

Calculate interest expense for 45 days on notes.

Interestexpense=Principalamount×Rateof interest×Time=$160,000 ×5% ×45360=$1,000 (3)

Calculate interest expense for 45 days on notes.

Interestexpense=Principalamount×Rateof interest×Time=$160,000 ×7% ×45360=$1,400 (4)

Calculate interest expense for 30 days on notes

2. a

To determine

To journalize: The adjusting entry for product warranty.

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