Q39PGB - Horngren'S Financial And Managerial Accounting

Question

Journalizing liability transactions and reporting them on the balance sheet

The following transactions of Great Value Pharmacies occurred during 2018 and 2019:

2018 

Mar. 1 Borrowed \(390,000 from Bartow Bank. The six-year, 13% note requires payments due annually, on March 1. Each payment consists of \)65,000 principal plus one year’s interest.

Dec. 1 Mortgaged the warehouse for \(350,000 cash with Saylor Bank. The mortgage requires monthly payments of \)7,000. The interest rate on the note is 9% and accrues monthly. The first payment is due on January 1, 2019.

31 Recorded interest accrued on the Saylor Bank note.

31 Recorded interest accrued on the Bartow Bank note.

2019

Jan. 1 Paid Saylor Bank monthly mortgage payment.

Feb. 1 Paid Saylor Bank monthly mortgage payment.

Mar. 1 Paid Saylor Bank monthly mortgage payment.

1 Paid first installment on note due to Bartow Bank.

Requirements

1. Journalize the transactions in the Great Value Pharmacies general journal. Round to the nearest dollar. Explanations are not required.

2. Prepare the liabilities section of the balance sheet for Great Value Pharmacies on March 1, 2019 after all the journal entries are recorded.

Step-by-Step Solution

Answer

The cash account is debited with $390,000 and the 13% notes payable account is credited with $390,000.

Step 1: Definition of the interest payable

The interest payable is the amount of the interest due at the end of the year.

Step 2: Journal entries

Date	Particulars	Debit	Credit
March 1, 2018	Cash	$390,000
	13% Notes Payable		$390,000
	(Being entry for the issue of notes)
December 31, 2018	Cash	$350,000
	9% Mortgage Payable		$350,000
	(Being entry for the issue of bonds)
December 31, 2018	Interest Expense	$2,625
	Interest Payable		$2,625
	(Being entry for the accrued interest)
December 31, 2018	Interest Expense	$42,250
	Interest Payable		$42,250
	(Being entry for the accrued interest)
January 1, 2019	Mortgage Payable	$4,375
	Interest Payable	$2,625
	Cash		$7,000
	(Being entry for the monthly payment)
February 1, 2019	Mortgage Payable	$4,408
	Interest Payable	$2,592
	Cash		$7,000
	(Being entry for the monthly payment)
March 1, 2019	Mortgage Payable	$4,441
	Interest Payable	$2,559
	Cash		$7,000
	(Being entry for the monthly payment)
March 1, 2019	Interest Payable	$8,450
	Interest Expense	$42,250
	Notes Payable	$65,000
	Cash		$115,700
	(Being entry for the payment of the first installment)

Step 3: Balance sheet

Great Value Pharmacies
Balance Sheet
On March 1, 2019
Current Liabilities:
Current Portion of Notes Payable	$65,000
Current Portion of Mortgage Payable	$55,963
Total Current Liabilities		$120,963
Long-Term liabilities:
Notes Payable	$260,000
Mortgage Payable	$280,813
Total Long-term Liabilities	$540,813
Total Liabilities	$661,776