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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. Instructions 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, $23,000. b. Interest on the nine remaining notes owed to Warick Co.

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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 11, Problem 1PA
Textbook Problem
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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.

Instructions

  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:
    1. a. Product warranty cost, $23,000.
    2. b. Interest on the nine remaining notes owed to Warick Co.

1.

To determine

Journalize the liabilities transactions.

Explanation of Solution

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.

Prepare journal entry to record the liabilities transactions of Corporation O.

DateAccounts and ExplanationPost RefDebit ($)Credit ($)
January  10Merchandise Inventory 240,000 
 Accounts Payable   240,000
 (To record purchase of merchandise on account)   
February 9Accounts payable 240,000 
 Notes Payable  240,000
 (To record the issue of 4% notes on account )   
March 11Notes Payable 240,000 
 Interest Expense (1) 800 
       Cash  240,800
 (To record payment of maturity and interest for notes)   
May 1Cash 160,000 
 Notes Payable  160,000
 (To record borrowing from T Bank by issuing 5% note)   
June 1Tools 178,500 
 Interest Expense (2) 1,500 
 Notes Payable  180,000
 (To record purchase of tools by issuing 5% discounted note)   
June 15Notes Payable 160,000 
 Interest Expense (3) 1,000 
 Notes Payable  160,000
 Cash  1,000
 (To record the payment of interest for T Bank and renew the loan by issuing 7% note)   
July 30Notes Payable 160,000 
 Interest Expense (4) 1,400 
       Cash  161,400
 (To record payment of maturity and interest for notes)   
July 30Notes Payable 180,000 
 Cash  180,000
 (To record the payment of due amount)   
December 1Office Equipment 400,000 
 Notes Payable   300,000
 Cash   100,000
 (To record purchase of office equipment for cash and issuing of 5% notes)   
December 15Litigation Loss 260,000 
    Litigation Claims Payable  260,000
 (To record the accrual of litigation claims)   
December 31Notes Payable 30,000 
 Interest Expense (5) 125 
       Cash  30,125
 (to record the paymnet of interets)   

Table (1)

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

2. a

To determine

Journalize the adjusting entry for product warranty.

2. b

To determine

Journalize the interest on notes payable.

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Chapter 11 Solutions

Financial Accounting
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