Reference no: EM13953095
Part A
The accountant for Lunn Express wants to develop a balance sheet as of December 31, 2014. The following items pertain to the Liability category and must be considered to determine the items that should be reported in the Current Liabilities section of the balance sheet. You may assume that Lunn began business on January 1, 2014; therefore, the beginning balance of all accounts was zero.
a. During 2014, Lunn purchased $100,000 of inventory on account from suppliers. By year- end, $40,000 of the balance had been eliminated as a result of payments. All items were pur- chased on terms of 2/10, n/30. Lunn uses the gross method of recording payables.
b. On April 1, 2014, Lunn borrowed $10,000 on a one-year note payable from Philips Bank. Terms of the loan indicate that Lunn must repay the principal and 12% interest at the due date of the note.
c. On October 1, 2014, Lunn also borrowed $8,000 from Dove Bank on a one-year note pay- able. Dove Bank deducted 10% interest in advance and gave to Lunn the net amount. At the due date, Lunn must repay the principal of $8,000.
d. On January 1, 2014, Lunn borrowed $20,000 from Owens Bank by signing a ten-year note payable. Terms of the note indicate that Lunn must make annual payments of principal each January 1 beginning in 2015 and must pay interest each January 1 in the amount of 8% of the outstanding balance of the loan.
e. The accountant for Lunn has completed an income statement for 2014 that indicates that income before taxes was $10,000. Lunn must pay tax at the rate of 40% and must remit the tax to the Internal Revenue Service by April 15, 2015.
f. As of December 31, 2014, Lunn owes its employees salaries of $3,000 for work performed in 2014. The employees will be paid on the first payday of 2015.
g. During 2014, two lawsuits were filed against Lunn. In the first lawsuit, a customer sued for damages because of an injury that occurred on Lunn's premises. Lunn's legal counsel advised that it is probable that the lawsuit will be settled in 2015 at an amount of $7,000. The second lawsuit involves a patent infringement suit of $14,000 filed against Lunn by a competitor. The legal counsel has advised that Lunn may be at fault but that a loss does not appear proba- ble at this time.