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 Aston Martin Inc. during the current year.

Apr. 15. Borrowed $225,000 from Audi Company, issuing a 30-day, 6% note for that amount.
May 1. Purchased equipment by issuing a $320,000, 180-day note to Spyder Manufacturing Co., which discounted the note at the rate of 6%.
15. Paid Audi Company the interest due on the note of April 15 and renewed the loan by issuing a new 60-day, 8% note for $225,000. (Record both the debit and credit to the notes payable account.)
July 14. Paid Audi Company the amount due on the note of May 15.
Aug. 16  Purchased merchandise on account from Exige Co., $90,000, terms, n/30.
Sept. 15 Issued a 45-day, 6% note for $90,000 to Exige Co., on account.
Oct. 28 Paid Spyder Manufacturing Co. the amount due on the note of May 1.
30 Paid Exige Co. the amount owed on the note of September 15.
Nov. 16 Purchased store equipment from Gallardo Co. for $450,000, paying $50,000 and issuing a series of twenty 9% notes for $20,000 each, coining due at 30-day intervals.
Dec. 16 Paid the amount due Gallardo Co. on the first note in the series issued on November 16.
28  Settled a personal injury lawsuit with a customer for $87,500, to be paid in January. Aston Martin Inc. accrued the loss in a litigation claims payable account.


1 Journalize the transactions.

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

a Product warranty cost, $26,800.

b Interest on the 19 remaining notes owed to Gallardo 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 discounted notes.

Interestexpense=Principalamount×Rateof interest×Time=$320,000 ×6% ×180360=$9,600 (1)

Calculate interest expense for 30 days on notes.

Interestexpense=Principalamount×Rateof interest×Time=$225,000 ×6% ×30360=$1,125 (2)

Calculate interest expense for 60 days on notes.

Interestexpense=Principalamount×Rateof interest×Time=$225,000 ×8% ×60360=$3,000 (3)

Calculate interest expense for 45 days on notes.

Interestexpense=Principalamount×Rateof interest×Time=$90,000 ×6% ×45360=$675 (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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