Shamsud Ltd. operates on a calendar-year basis. At the beginning of December 2011, the company had the following current liabilities on its books:
Accounts payable………………………………….$85,000
Rent payable………………………………………. 10,000
Obligations under warranties……………………… 12,000
Unearned revenue…………………………………. 14,000
In December, the following events occurred:
1. Shamsud purchased a new computer system on account at a cost of $28,000, payable on January 15, 2012. In addition to this, $4,000 was paid in cash to have the new system installed and customized to the company's requirements.
2. The company purchased inventory for $93,000 on account and made payments of $86,000 to its suppliers.
3. The rent that was payable at the beginning of December represented the payment that should have been made in November. In December, Shamsud paid the past rent owed, as well as the rent for December and January.
4. By December 31, the company had earned $5,000 of the revenue that was received in advance from customers.
5. Shamsud's employees are paid a total of $2,000 per day. Three work days elapsed between the last payday and the end of the fiscal year. (Ignore deductions for income tax, CPP, and EI.)
6. The company's products are sold with a two-year warranty. Shamsud estimates its warranty expense for the year (not previously recorded) as $16,000. During December, it paid $1,200 in warranty claims.
7. The company borrowed $60,000 Irom the bank on December 15 at an interest rate of 8%. The principal and interest are due six months from the date of the loan.
8. Since the beginning of 2011, Shamsud has had a five-year note payable of $125,000 outstanding. The note requires that annual interest payments at 7% be made, and that $25,000 of the principal be repaid each January 1.
Required:
a. Prepare the journal entries to record the December transactions and adjustments. (Ignore the amounts that the company pays for its share of CPP and EI.)
b. Prepare the current liability section of Shamsud's balance sheet on December 31, 2011.
c. Explain your treatment of the five-year note payable.