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).
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