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Liability Transactions The following items were selected from among the transact

ID: 341220 • Letter: L

Question

Liability Transactions The following items were selected from among the transactions completed by O'Donnel Co. during the current year: Jan. 10. Purchased merchandise on account from Laine Co., $144,000, terms n/30. Feb. 9. Issued a 30-day, 796 note for $144,000 to Laine Co., on account. Mar. 11. Paid Laine Co. the amount owed on the note of February 9. May 1 . Borrowed $154,800 from Tabata Bank, issuing a 45-day, 8% note. June 1. Purchased tools by issuing a $114,000, 60-day note to Gibala Supply Co., which discounted the note at the rate of 9%. 15. Paid Tabata Bank the interest due on the note of May 1 and renewed the loan by issuing a new 45-day, 7% note for $154,800. (Journalize both the debit and credit to the notes payable account.) July 30. Paid Tabata Bank the amount due on the note of June 15 30. Paid Gibala Co. the amount due on the note of June 1. Dec. 1. Purchased office equipment from Warick Co. for $108,000, paying $18,000 and issuing a series of ten 5% notes for $9,000 each, coming due at 30-day intervals. 15. Settled a product liability lawsuit with a customer for $75,000, payable in January. O'Donnel accrued the loss in a litigation claims payable account. 31. Paid the amount due Warick Co. on the first note in the series issued on December 1

Explanation / Answer

Solution:

1.

Jan.   10   Merchandise Inventory..............................................           144,000

                        Accounts Payable—Laine Co............................                                   144,000

Feb.     9   Accounts Payable—Laine Co..................................           144,000

                        Notes Payable........................................................                                   144,000

Mar.   11   Notes Payable..............................................................           144,000

                  Interest Expense ($144,000 × 30/360 × 7%)..........                  840

                        Cash.........................................................................                                   144,840

May     1   Cash...............................................................................           154,800

                        Notes Payable........................................................                                   154,800

     Jun 1   Tools..............................................................................           112,290

                  Interest Expense ($114,000 × 60/360 × 9%)..........               1,710

                        Notes Payable........................................................                                   114,000

Jun. 15   Notes Payable..............................................................           154,800

                  Interest Expense ($154,800 × 45/360 × 8%)..........               1,548

                        Notes Payable........................................................                                   154,800

                        Cash.........................................................................                                       1,548

Jul.    30   Notes Payable..............................................................           154,800

                  Interest Expense ($154,800 × 45/360 × 7%)..........               1,355

                        Cash.........................................................................                                   156,155

           30   Notes Payable..............................................................           114,000

                        Cash.........................................................................                                   114,000

Dec.    1   Office Equipment........................................................           108,000

                        Notes Payable........................................................                                     90,000

                        Cash.........................................................................                                     18,000

           15   Litigation Loss.............................................................             75,000

                        Litigation Claims Payable...................................                                     75,000

           31   Notes Payable..............................................................               9,000

                  Interest Expense ($9,000 × 5% × 30/360)...............                     38

                        Cash.........................................................................                                       9,038

2.    a.   Product Warranty Expense.......................................... 16,100

                    ...................................... Product Warranty Payable 16,100

                          ......... Warranty expense for the current year.

        b.   Interest Expense.............................................................. 338

                    ......................................................... Interest Payable 338

                          . Interest on notes, $9,000 × 5% × 30/360 × 9.

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