P13-2 (Liability Entries and Adjustments) Listed below are selected transactions of Schultz Department Store for the current year ending December 31.

1. On December 5, the store received $500 from the Jackson Players as a deposit to be returned after certain furniture to be used in stage production was returned on January 15.
2. During December, cash sales totaled $798,000, which includes the 5% sales tax that must be remitted to the state by the fifteenth day of the following month.
3. On December 10, the store purchased for cash three delivery trucks for $120,000. The trucks were purchased in a state that applies a 5% sales tax.
4. The store determined it will cost $100,000 to restore the area (considered a land improvement) surrounding one of its store parking lots, when the store is closed in 2 years. Schultz estimates the fair value of the obligation at December 31 is $84,000.

Instructions

Prepare all the journal entries necessary to record the transactions noted above as they occurred and any adjusting journal entries relative to the transactions that would be required to present fair financial statements at December 31. Date each entry. For simplicity, assume that adjusting entries are recorded only once a year on December 31.

Solution

Dec. 5 

(D) Cash = 500 

(C) Returnable Deposit (Liability) = 500 

Dec. 1-31 

(D) Cash = 798,000 

(C) Sales ($798,000 ÷ 1.05) = 760,000 

(C) Sales Taxes Payable ($760,000 X .05) = 38,000 

Dec. 10 

(D) Trucks ($120,000 X 1.05) = 126,000 

(C) Cash = 126,000 

Dec. 31 

(D) Parking Lot = 84,000 

(C) Environmental Liability = 84,000

P13-1 (Current Liability Entries and Adjustments) Described below are certain transactions of Edwardson Corporation. The company uses the periodic inventory system.

1. On February 2, the corporation purchased goods from Martin Company for $70,000 subject to cash discount terms of 2/10, n/30. Purchases and accounts payable are recorded by the corporation at net amounts after cash discounts. The invoice was paid on February 26.
2. On April 1, the corporation bought a truck for $50,000 from General Motors Company, paying $4,000 in cash and signing a one-year, 12% note for the balance of the purchase price.
3. On May 1, the corporation borrowed $83,000 from Chicago National Bank by signing a $92,000 zero-interest-bearing note due one year from May 1.
4. On August 1, the board of directors declared a $300,000 cash dividend that was payable on September 10 to stockholders of record on August 31.

Instructions

(a) Make all the journal entries necessary to record the transactions above using appropriate dates. 

(b) Edwardson Corporation’s year-end is December 31. Assuming that no adjusting entries relative to the transactions above have been recorded, prepare any adjusting journal entries concerning interest that are necessary to present fair financial statements at December 31. Assume straight-line amortization of discounts.

Solution 

(a) 

February 2:

(D) Purchases ($70,000 X 98%) = 68.600 

(C) Accounts Payable = 68.600 

February 26: 

(D) Accounts Payable = 68,600 

(D) Purchase Discounts Lost = 1,400 

(C) Cash = 70,000 

April 1: 

(D) Trucks = 50,000 

(C) Cash = 4,000 

(C) Notes Payable = 46,000 

August 1: 

(D) Retained Earnings (Dividends Declared) = 300,000 

(C) Dividends Payable = 300,000 

September 10: 

(D) Dividends Payable = 300,000 

(C) Cash = 300,000  

 

(b) 

December 31: 

1. No adjustment necessary 

2. (D) Interest Expense ($46,000 X 12% X 9/12) = 4,140 

(C) Interest Payable = 4,140 

3. No adjustment necessary