Chapter 9, Problem 9.1P

Recording and Reporting Current Liabilities

LO9-1 Vigeland Company completed the following transactions during Year 1. Vigeland’s fiscal year ends on

December 31.

Jan.	15	Purchased and paid for merchandise. The invoice amount was $26,500; assume a perpetual inventory system.
Apr.	1	Borrowed $700,000 from Summit Bank for general use; signed a 10-month, 6% annual interest-bearing note for the money.
June	14	Received a $15,000 customer deposit for services to be performed in the future.
July	15	Performed $3,750 of the services paid for on June 14.
Dec.	12	Received electric bill for $27,860. Vigeland plans to pay the bill in early January.
	31	Determined wages of $15,000 were earned but not yet paid on 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.

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 the purchase and payment of merchandise.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
January 15	Inventory	26,500
	Cash		26,500
	(To record the purchase and payment of merchandise)

(Table 1)

• Inventory is an asset and there is an increase in the value of the assets. Hence, debit the inventory by $26,500.
• Cash is an asset and there is a decrease in the value of the asset. Hence, credit the assets by $26,500

Prepare journal entry to record the borrowing of $700,000 from Bank S for general use; signed a 10 month, annual interest-bearing note for the money.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
April 1	Cash	700,000
	Notes payable		700,000
	(To record the borrowing of money on a short-term)

(Table 2)

• Cash is an asset and there is an increase in the value of the asset. Hence, debit the cash by $700,000.
• Notes payable is a liability and there is an increase in the value of liability. Hence, credit the notes payable by $700,000.

Prepare journal entry to record the customer deposit for services to be performed in the future.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
June 14	Cash	15,000
	Deferred Revenue		15,000
	(To record the customer deposit of $15,000 for the services to be performed in future )

(Table 3)

• Cash is an asset and there is an increase in the value of the asset. Hence, debit the cash by $15,000.
• Deferred Revenue is a liability and there is an increase in the value of liability. Hence, credit the deferred revenue by $15,000.

Prepare journal entry to record the cash paid on the services performed on June 14.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
June 15	Deferred Revenue	3,750
	Service Revenue		3,750
	(To record the cash paid on the service performed on June 14)

(Table 4)

• Deferred Revenue is a liability and there is a decrease in the value of liability. Hence, debit the deferred revenue by $3,750.
• Sales Revenue is a component of stockholder’s equity and there is an increase in the value of equity. Hence, credit the sales revenue by $3,750.

Prepare journal entry to record the electricity bill of $27,680 that is to be paid in early of January.

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 12	Electricity expense	27,680
	Electric payable		27,680
	(To record the electricity bill of $27,680)

(Table 5)

• Electricity expense is a component of stockholder’s equity and there is an increase in the value of equity. Hence, debit the electricity expense by $27,680.
• Electricity payable is a liability and there is an increase in the value of equity. Hence, credit the electricity payable by $27,680.

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

Date	Account Titles and Explanation	Debit (Amount in $)	Credit (Amount in $)
December 31	Wages expense	15,000
	Wages payable		15,000
	(To record the wages earned but not yet paid on December 31.)

(Table 6)

• Wages expense is a component of stockholder’s equity and there is an increase in the value of equity. Hence, debit the wages expense by $15,000.
• Wages payable is a liability and there is an increase in the value of equity. Hence, credit the wages payable by $15,000.

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	31,500
	Interest  payable (1)		31,500
	(To record the adjusting entry for interest payable on December 31.)

(Table 7)

• Interest expense is a component of stockholder’s equity and there is an increase in the value of equity. Hence, debit the interest expense by $31,500.
• Interest payable is a liability and there is an increase in the value of equity. Hence, credit the interest payable by $31,500.

Working Note:

$\begin{array}{c}\text{Interest Payable = }\left(\begin{array}{l}\text{Principal Amount}\times \text{ Annual Interest rate}\\ \times \text{ Number of period}\end{array}\right)\\ =\$700,000\times 6\%\times \frac{9}{12}\\ =\$31,500\end{array}$ (1)