Required:

1. Prepare the appropriate journal entries for the 2006 transactions.

2. Prepare the liability section of the balance sheet at December 31, 2006, based on the data supplied.

3. Prepare the appropriate journal entries for the 2007 transactions.

Answer:

Requirement 1:

2006:

1. No entry is made for a line of credit until a loan is made. It would be disclosed in a footnote.

(b.)	Cash	8,000,000
	Notes payable		8,000,000
(c.)	Cash	3,000
	Liability-refundable deposits		3,000
(d.)	Accounts receivable	5,150,000
	Sales		5,000,000
	Sales tax payable		150,000	($5M x 75%) x 4%
(e.)	Interest expense	200,000
	Interest payable		200,000
	($8,000,000 x 10% x 3/12)

Requirement 2:

	Current Liabilities:
	Notes payable	$8,000,000
	Sales tax payable	150,000
	Liability-refundable deposits	3,000
	Interest payable	200,000
	Total current liabilities	$8,353,000

Requirement 3:

2007:
(a.)	Interest expense*	133,333
	Interest payable	200,000
	Notes payable	8,000,000
	Cash		8,333,333
	*($8,000,000 x 10% x 2/12)
(b.)	Liability-refundable deposits	1,500
	Cash		1,500

Learning Objective: 2 Level of Learning: 3

127. Hardin Widget Manufacturing began operations in January 2006. Hardin sells widgets that carry a two-year manufacturer's warranty against defects in workmanship. Hardin's management project that 2% of the widgets will require repair during the first year of the warranty while approximately 6% will require repair during the second year of the warranty. The widgets sell for $400 each. The average cost to repair a widget is $50. The company sells 60% of the widgets to retail customers who must pay a 6% sales tax. Sales and warranty information for 2006 and 2007 are as follows:

2006: Sold 200 widgets on account; incurred warranty expenditures of $300.

2007: Sold 300 widgets on account; actual warranty expenditures were $500.