Chapter 9, Problem 9.1AP

ALTERNATE PROBLEMS

AP9-1 Recording and Reporting Current Liabilities with Discussion of Cash Flow Effects (P9-2)

LO9-1, 9-5 Sturgis Company completed the following transactions during Year 1. Sturgis’s fiscal year ends on December 31.

Jan.	15	Recorded tax expense for the year in the amount of $125,000. The tax liability owed to the IRS this year was $93,000. Any deferred tax liability is a current liability.
	31	Paid previously accrued interest expense in the amount of $52,000.
Apr.	30	Borrowed $550,000 from Commerce Bank; signed a 12-month, 12% annual Interest-bearing note for the money.
June	3	Purchased merchandise for resale on account. The invoice amount was $75,820.
July	5	Paid June 3 invoice in full.
Aug.	31	Signed contract to provide security service to a small apartment complex and collected six months’ fees in advance amounting to $12,000.
Dec.	31	Reclassified a long-term liability in the amount of $100,000 as a current liability.
	31	Determined salary and wages of $85,000 earned but not yet paid December 31 (disregard payroll taxes).

Required:

1. 1. Prepare journal entries for each of these transactions.
2. 2. Prepare all adjusting entries required on December 31.
3. 3. What is the total amount of liabilities arising from these transactions that will be reported on the fiscal year-end balance sheet?
4. 4. For each transaction, state whether operating cash flows increase, decrease, or are not affected.

To determine

Prepare journal entries to record each of the given transactions.

Explanation of Solution

Journal:

Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Accounting rules for journal entries:

• To record increase balance of account: Debit assets, expenses, losses and credit liabilities, capital, revenue and gains.
• To record decrease balance of account: Credit assets, expenses, losses and debit liabilities, capital, revenue and gains.

Prepare journal entry to record tax expense for the year of $125,000 and the tax liability owed to the IRS during the year.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
January 15	Tax expense	125,000
	Taxes payable		93,000
	Deferred tax liability		32,000
	(To record tax expense and tax liability)

(Table 1)

• Tax expense is a component of stockholder’s equity; there is an increase in the value expense and decrease in the value of equity. Hence, Debit the tax expense by $125,000.
• Taxes payable is a liability and there is an increase in the value of liability. Hence, credit taxes payable by $93,000.
• Deferred tax liability is a liability and there is an increase in the value of liability. Hence, credit deferred tax liability by $32,000.

Prepare journal entry to record the previously paid accrued interest expense of $52,000.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
January 31	Interest payable	52,000
	Cash		52,000
	(To record the previously paid accrued interest expense of $52,000)

(Table 2)

• Interest payable is a liability and there is a decrease in the value of liability. Hence, debit interest payable by $52,000.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit the cash by $52,000.

Prepare journal entry to record the amount borrowed from the Bank C for a general use; by signing a 12 month, 12% annual interest bearing note for the money.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
April 30	Cash	35,000
	Notes payable		35,000
	(To record the borrowing of money on a short term)

(Table 3)

• Cash is an asset and there is an increase in the value of the asset. Hence, debit the cash by $550,000.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $550,000.

Prepare journal entry to record the purchase of merchandise for resale on account.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
June 3	Inventory	75,820
	Accounts payable		75,820
	(To record the purchase merchandise for resale)

(Table 4)

• Inventory is an asset and there is an increase in the value of the assets. Hence, debit the inventory by $75,820.
• Accounts payable is a liability and there is an increase in the value of liability. Hence, credit accounts payable by $75,820.

Prepare journal entry to record the payment for the purchase made.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
July 5	Accounts payable	75,820
	Cash		75,820
	(To record the payment made for the purchase)

(Table 5)

• Accounts payable is a liability and there is a decrease in the value of liability. Hence, debit liability by $75,820.
• Cash is an asset and there is a decrease in the value of asset. Hence, credit the asset by $75,820.

Prepare journal entry to record the contract signed for security service to a small apartment and collecting of six month’s fees in advance amounting to $12,000.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
August 31	Cash	12,000
	Deferred Revenue		12,000
	(To record the collecting of six month’s fee in advance amounting to $12,000)

(Table 6)

• Cash is an asset and there is an increase in the value of the asset. Hence, debit the cash by $12,000.
• Deferred Revenue is a liability and there is an increase in the value of liability. Hence, credit the deferred revenue by $12,000.

To determine

Prepare adjusting entries required on December31.

Explanation of Solution

Adjusting entries:

Adjusting entries refers to the entries that are made at the end of an accounting period in accordance with revenue recognition principle, and expenses recognition principle.  The purpose of adjusting entries is to adjust the revenue, and the expenses during the period in which they actually occurs.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Interest expense	44,000
	Interest  payable (1)		44,000
	(To record the adjusting entry for interest payable on December 31.)

(Table 7)

• Interest expense is a component of stockholder’s equity; there is a decrease in the value of equity and increase in the value of expense. Hence, debit the interest expense by $44,000.
• Interest payable is a liability and there is an increase in the value of equity. Hence, credit the interest payable by $44,000.

Working Note:

$\begin{array}{c}\text{Interest Payable = }\left(\begin{array}{l}\text{Principal Amount}\times \text{ Annual Interest rate}\\ \times \text{ Number of period}\end{array}\right)\\ =\$550,000\times 12\%\times \frac{8(\text{May 1 to December 31)}}{12}\\ =\$44,000\end{array}$ (1)

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Deferred revenue	8,000
	Security revenue (2)		8,000
	(To record the adjusting entry for security revenue on December 31.)

(Table 8)

• Deferred revenue is a liability and there is a decrease in the value of liability. Hence, debit deferred revenue by $8,000.
• Security revenue is a component of stockholder’s equity and there is an increase in the value of equity. Hence, credit security revenue by $8,000.

Working Note:

$\begin{array}{c}\text{Rent revenue = }\left(\text{Deferred rent revenue}\times \text{Number of period}\right)\\ =\$12,000\times \frac{4(\text{September1 to December 31)}}{6}\\ =\$8,000\end{array}$ (2)

Prepare journal entry to record the long-term liability of $100,000 to current liability on December 31.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Long-term liability	100,000
	Current liability		100,000
	(To record the adjusting entry for long-term liability on December 31.)

(Table 9)

• Long-term liability is a liability and there is a decrease in the value of liability. Hence, debit the liability by $100,000.
• Current liability is a liability and there is an increase in the value of liability. Hence, credit the liability by $100,000.

Prepare journal entry to record the salaries and wages earned but not yet paid on December 31.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Wages expense	85,000
	Wages payable		85,000
	(To record the wages earned but not yet paid on December 31.)

(Table 10)

• Wages expense is a component of stockholder’s equity; there is a decrease in the value of equity and increase in the value of expense. Hence, debit the wages expense by $85,000.
• Wages payable is a liability and there is an increase in the value of equity. Hence, credit the wages payable by $85,000.

To determine

Identify the total amount of liabilities arising from the transactions that will be reported on the fiscal year-end balance sheet.

Explanation of Solution

Identify the total amount of liabilities arising from the transactions that will be reported on the fiscal year-end balance sheet:

Balance Sheet December 31
Particulars	Amount in $
Current Liabilities:
Wages payable	85,000
Taxes payable	93,000
Deferred tax liability	32,000
Interest payable	44,000
Deferred Revenue	4,000
Notes payable	550,000
Current portion of long-term debt	100,000
Total Current Liabilities	908,000

(Table 11)

To determine

Identify whether the operating cash flow increase, decrease or are not affected for the given transactions.

Explanation of Solution

Identify whether the operating cash flow increase, decrease or are not affected for the given transactions:

Date	Transaction	Effect
January15	Tax expense for the year of $125,000 and the tax liability owed to the IRS during the year.	No Effect
January 31	Previously paid accrued interest expense of $52,000	Decrease
April 30	Borrowing of money on a short term	No Effect
June 3	Purchase merchandise for resale	No Effect
July 5	Payment made for the purchase	Decrease
August 31	Collecting of six month’s rent in advance amounting to $12,000	Increase
December 31	Wages earned but not yet paid on December 31.	No Effect
December 31	Reclassified long-term liability to current liability.	No Effect
December 31	Adjusting entry for interest payable.	No Effect
December 31	Adjusting entry for security revenue.	No Effect

(Table 12)