GB 112/212 MANAGERIAL ACC. W/ACCESS >C<
GB 112/212 MANAGERIAL ACC. W/ACCESS >C<
17th Edition
ISBN: 9781260218831
Author: Libby
Publisher: MCG CUSTOM
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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.

1.

Expert Solution
Check Mark
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.

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

January

15

Tax expense125,000
Taxes payable93,000
Deferred tax liability32,000
(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.

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

January

31

Interest payable52,000
Cash52,000
(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.

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

April 30Cash35,000
Notes payable35,000
(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.

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

June 3Inventory75,820
Accounts payable75,820
(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.

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

July 5Accounts payable75,820
Cash75,820
(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.

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

August 31Cash12,000
Deferred Revenue12,000
(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.

2.

Expert Solution
Check Mark
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.

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

December 31Interest expense44,000
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:

Interest Payable = (Principal Amount× Annual Interest rate× Number of period)=$550,000×12%×8(May 1 to December 31)12=$44,000 (1)

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

December 31Deferred revenue8,000
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:

Rent revenue = (Deferred rent revenue×Number of period)=$12,000×4(September1 to December 31)6=$8,000 (2)

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

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

December 31Long-term liability100,000
Current liability100,000
(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.

DateAccount Titles and Explanation

Debit

(Amount in $)

Credit

(Amount in $)

December 31Wages expense85,000
Wages payable85,000
(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.

3.

Expert Solution
Check Mark
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

ParticularsAmount in $
Current Liabilities:
Wages payable85,000
Taxes payable93,000
Deferred tax liability32,000
Interest payable44,000
Deferred Revenue4,000
Notes payable550,000
Current portion of long-term debt100,000
Total Current Liabilities908,000

(Table 11)

4.

Expert Solution
Check Mark
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:

DateTransactionEffect
January15Tax expense for the year of $125,000 and the tax liability owed to the IRS during the year.No Effect
January 31Previously paid accrued interest expense of $52,000Decrease
April 30Borrowing of money on a short termNo Effect
June 3Purchase merchandise for resaleNo Effect
July 5Payment made for the purchaseDecrease
August 31Collecting of six month’s rent in advance amounting to $12,000Increase
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)

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GB 112/212 MANAGERIAL ACC. W/ACCESS >C<

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