Question

Jack Hammer Company completed the following transactions. The annual accounting period ends December 31. Apr. 30 Received $624,000 from Commerce Bank after signing a 12-month, 7.00 percent, promissory note. June 6 Purchased merchandise on account at a cost of $77,000. (Assume a perpetual inventory system.) July 15 Paid for the June 6 purchase. Aug. 31 Signed a contract to provide security service to a small apartment complex starting in September, and collected six months’ fees in advance, amounting to $25,000. Dec. 31 Determined salary and wages of $42,000 were earned but not yet paid as of December 31 (ignore payroll taxes). Dec. 31 Adjusted the accounts at year-end, relating to interest. Dec. 31 Adjusted the accounts at year-end, relating to security service.
Required
Complete the required journal entries for each of the above transactions.
Show how all of the liabilities arising from these items are reported on the balance sheet at December 31.

Answer 1

Answer:

A) Journal entries:

Apr 30 - Debit Cash Account with $624,000

Credit Note Payable (Commerce Bank) with $624,000

Being 12-month, 7% promissory note

June 6 - Debit Purchases Account with $77,000

Credit Accounts Payable with $77,000

Being purchase of goods on account

July 15 - Debit Accounts Payable with $77,000

Credit Cash Account with $77,000

Being payment for goods bought on account

Aug 31 - Debit Cash Account with $25,000

Credit Deferred Revenue with $25,000

Being Security service income received in advance

Dec 31 - Debit Salaries & Wages Account with $42,000

Credit Salaries & Wages Payable Account with $42,000

Being salaries & wages due but not paid

Dec 31 Debit Interest Expense Account with $29,120

Credit Interest Payable Account with $29,120

Being 7% interest on 12-months Note from Commerce Bank accrued for 8 months.

Dec 31 - Debit Deferred Revenue with $16,667

Credit Security Service Income Account with $16,667

Being security service income due for 4 months.

B) Liabilities Arising from above items to be reported in Balance Sheet at December 31:

1) Notes Payable - $624,000

2) Deferred Revenue - $8,333 ($25,000 - $16,667)

3) Wages Payable - $42,000

4) Interest Payable - $29,120

Explanation:

a) The 12-month 7% Note received from Commerce Bank on April 30 increases the Cash and the Notes Payable by $624,000.  This balance represents a liability in the balance sheet.

b) The purchase of goods on June 6 increases Inventory and Accounts Payable by $77,000.  And the payment on July 15 cancels out the Payable while reducing Cash balance.  There is no liability arising from these transactions on the balance sheet date.

c) When payment for security service is received six months in advance, there is a deferred revenue to be recognized.  Part of this (for 4 months) is later recognized in the accounts because the service had been rendered partly.  This is equal to $25,000 x 4/6 = $16,667.  The balance of $8,333 is recognized as a liability.

d) Salaries and Wages determined to be $42,000 were not paid as at December 31.  This gives rise to a liability (Wages Payable).  However, the unpaid $42,000 is accrued and recognized as an expense in the income statement.

e) Interest Expense Account is calculated at 7% on the 12-month Promissory Note of $624,000 for 8 months.  This gives $29,120 (624,000 x 7% x 8/12).

Answer 2

Answer:

April 30, received a bank loan from Commerce Bank:

Dr Cash 624,000

    Cr Notes payable 624,000

June 6, purchased merchandise on account:

Dr Merchandise inventory 77,000

    Cr Accounts payable 77,000

July 15, paid merchandise invoice:

Dr Accounts payable 77,000

    Cr Cash 77,000

August 31, signed a 6 month contract for security services:

Dr Cash 25,000

    Cr Unearned revenue 25,000

December 31, determined amount of wages payable:

Dr Wages expense 42,000

    Cr Wages payable 42,000

December 31, adjustment to service contract:

Dr Unearned revenue 16,667 (= $25,000 x 4/6)

    Cr Service revenue 16,667

December 31, adjustment to bank loan:

Dr Interest expense 29,120 (= $624,000 x 7% x 8/12)

    Cr Accrued interest payable - notes payable 29,120

All the liabilities will be recorded under current liabilities since they are due within the next year:

• Notes payable - bank loan $624,000
• Interest payable on bank loan $29,120
• Wages payable $42,000
• Unearned revenue $8,333