Reporting and Analyzing Liabilities

Financial Accounting Tools for Business Decision Making 6th Edition Solutions Manual and Test Bank

Solutions Manual and Test Bank Financial Accounting Tools for Business Decision Making 6th Edition   -- $35

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Sample Questions

1. Emily Frazier believes a current liability is a debt that can be expected to be paid in one year. Is Emily correct? Explain.
2. Verona Company obtains $20,000 in cash by signing a 9%, 6-month, $20,000 note payable to First Bank on July 1. Verona’s fiscal year ends on September 30. What information should be reported for the note payable in the annual financial statements?
3. (a) Your roommate says, “Sales taxes are reported as an expense in the income statement.” Do you agree? Explain.
(b) Pearl’s Cafe has cash proceeds from sales of $8,550. This amount includes $550 of sales taxes. Give the entry to record the proceeds.
4. Helena University sold 9,000 season football tickets at $100 each for its five-game home schedule. What entries should be made
(a) when the tickets are sold and
(b) after each game?
5. Identify three taxes commonly withheld by the employer from an employee’s gross pay.
6. (a) Identify three taxes commonly paid by employers on employees’ salaries and wages.
(b) Where in the financial statements does the employer report taxes withheld from employees’ pay?
7. Identify the liabilities classified by Tootsie Roll as current.
8.
(a) What are long-term liabilities? Give two examples.
(b) What is a bond?
9. Contrast these types of bonds:
(a) Secured and unsecured.
(b) Convertible and callable.
10. Explain each of these important terms in issuing bonds:
(a) Face value.
(b) Contractual interest rate.
(c) Bond certificate.
11. (a) What is a convertible bond?
(b) Discuss the advantages of a convertible bond from the standpoint of the bondholders and of the issuing corporation.
12. Describe the two major obligations incurred by a company when bonds are issued.
13. Assume that Visitin Inc. sold bonds with a face value of $100,000 for $104,000. Was the market interest rate equal to, less than, or greater than the bonds’ contractual interest rate? Explain.
14. Phil and Mason are discussing how the market price of a bond is determined. Phil believes that the market price of a bond is solely a function of the amount of the principal payment at the end of the term of a bond. Is he right? Discuss.
15. If a 6%, 10-year, $800,000 bond is issued at face and interest is paid annually, what is the amount of the interest payment at the end of the first period?
16. If the Bonds Payable account has a balance of $700,000 and the Discount on Bonds Payable account has a balance of $36,000, what is the carrying value of the bonds?
17. Which accounts are debited and which are credited if a bond issue originally sold at a premium is redeemed before maturity at 97 immediately following the payment of interest?
18. Barbara Monroe, the chief financial officer of Helaine Inc., is considering the options available to her for financing the company’s new plant. Shortterm interest rates right now are 6%, and long-term rates are 8%. The company’s current ratio is 2.2:1. If she finances the new plant with short-term debt, the current ratio will fall to 1.5:1. Briefly discuss the issues that Barbara should consider.
19.(a) In general, what are the requirements for the financial statement presentation of long-term liabilities?
(b) What ratios may be computed to evaluate a company’s liquidity and solvency?
20. Gerald Bachus says that liquidity and solvency are the same thing. Is he correct? If not, how do they differ?
21. The management of Lakeland Corporation is concerned because survey data suggest that many potential customers do not buy vehicles due to quality concerns. It is considering taking the bold step of increasing the length of its warranty from the industry standard of 3 years up to an unprecedented 10 years in an effort to increase confidence in its quality. Discuss the business as well as accounting implications of this move.
22. Rick Flowers needs a few new trucks for his business. He is considering buying the trucks but is concerned that the additional debt he will need to borrow will make his liquidity and solvency ratios look bad. What options does he have other than purchasing the trucks, and how will these options affect his financial statements?
23. Miller Corporation has a current ratio of 1.1. Ron has always been told that a corporation’s current ratio should exceed 2.0. Miller argues that its ratio is low because it has a minimal amount of inventory on hand so as to reduce operating costs. Miller also points out that it has significant available lines of credit. Is Ron still correct? What do some companies do to compensate for having fewer liquid assets?
24. What are the implications for analysis if a company has significant operating leases?
25. What criteria must be met before a contingency must be recorded as a liability? How should the contingency be disclosed if the criteria are not met?
*26. Explain the straight-line method of amortizing discount and premium on bonds payable.
*27. Melanie Corporation issues $200,000 of 6%, 5-year bonds on January 1, 2012, at 103. Assuming that the straight-line method is used to amortize the premium, what is the total amount of interest expense for 2012?
*28. Joslyn Topp is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Joslyn is saying?
*29. Ziegler Corporation issues $400,000 of 9%, 5-year bonds on January 1, 2012, at 104. If Ziegler uses the effective-interest method in amortizing the premium, will the annual interest expense increase or decrease over the life of the bonds? Explain.

Brief Exercises

BE10-1 Jasper Company has these obligations at December 31:
(a) a note payable for $100,000 due in 2 years,
(b) a 10-year mortgage payable of $200,000 payable in ten $20,000 annual payments,
(c) interest payable of $15,000 on the mortgage, and
(d) accounts payable of $60,000. For each obligation, indicate whether it should be classified as a current liability.
BE10-2 Canney Company borrows $90,000 on July 1 from the bank by signing a $90,000, 7%, 1-year note payable. Prepare the journal entries to record
(a) the proceeds of the note and
(b) accrued interest at December 31, assuming adjusting entries are made only at the end of the year.
BE10-3 Home Town Supply does not segregate sales and sales taxes at the time of sale. The register total for March 16 is $10,388. All sales are subject to a 6% sales tax. Compute sales taxes payable and make the entry to record sales taxes payable and sales.
BE10-4 Franklin University sells 3,500 season basketball tickets at $80 each for its 10-game home schedule. Give the entry to record
(a) the sale of the season tickets and
(b) the revenue earned by playing the first home game.
BE10-5 Cindy Neuer’s regular hourly wage rate is $16, and she receives an hourly rate of $24 for work in excess of 40 hours. During a January pay period, Cindy works 47 hours. Cindy’s federal income tax withholding is $95, and she has no voluntary deductions. Compute Cindy Neuer’s gross earnings and net pay for the pay period. Assume that the FICA tax rate is 8%.
BE10-6 Data for Cindy Neuer are presented in
BE10-5. Prepare the employer’s journal entries to record
(a) Cindy’s pay for the period and
(b) the payment of Cindy’s wages. Use January 15 for the end of the pay period and the payment date.
BE10-7 Palmer Corporation issued 3,000 7%, 5-year, $1,000 bonds dated January 1, 2012, at face value. Interest is paid each January 1.
(a) Prepare the journal entry to record the sale of these bonds on January 1, 2012.
(b) Prepare the adjusting journal entry on December 31, 2012, to record interest expense.
(c) Prepare the journal entry on January 1, 2013, to record interest paid.
BE10-8 The balance sheet for Claremont Company reports the following information on July 1, 2012. CLAREMONT COMPANY Balance Sheet (partial) Long-term liabilities Bonds payable $2,000,000 Less: Discount on bonds payable 45,000 $1,955,000 Claremont decides to redeem these bonds at 102 after paying annual interest. Prepare the journal entry to record the redemption on July 1, 2012. Identify whether obligations are current liabilities. (SO 1), C Prepare entries for an interest-bearing note payable. (SO 2), AP Compute and record sales taxes payable. (SO 3), AP Prepare entries for unearned revenues. (SO 3), AP Compute gross earnings and net pay. (SO 3), AP Record a payroll and the payment of wages. (SO 3), AP Prepare journal entries for bonds issued at face value. (SO 5), AP Prepare journal entry for redemption of bonds. (SO 6), AP 544 chapter 10 Reporting and Analyzing Liabilities
BE10-9 Presented here are long-term liability items for Borders Inc. at December 31, 2012. Prepare the long-term liabilities section of the balance sheet for Borders Inc. Bonds payable (due 2016) $700,000 Notes payable (due 2014) 80,000 Discount on bonds payable 28,000
BE10-10 Presented here are liability items for Azarian Inc. at December 31, 2012. Prepare the liabilities section of Azarian’s balance sheet. Accounts payable $157,000 FICA taxes payable $ 7,800 Notes payable 20,000 (due May 1, 2013) Interest payable 40,000 Bonds payable (due 2016) 900,000 Notes payable (due 2014) 80,000 Unearned sales revenue 240,000 Income taxes payable 3,500 Discount on bonds payable 41,000 Sales taxes payable 1,700
BE10-11 The 2009 adidas financial statements contain the following selected data (in millions). Current assets $4,485 Interest expense $169 Total assets 8,875 Income taxes 113 Current liabilities 2,836 Net income 245 Total liabilities 5,099 Cash 775 Compute the following values and provide a brief interpretation of each.
(a) Working capital.
(c) Debt to total assets ratio.
(b) Current ratio.
(d) Times interest earned ratio.
BE10-12 The Canadian National Railway Company’s (CN) total assets in a recent year were $24,004 million and its total liabilities were $14,180 million. That year, CN reported operating lease commitments for its locomotives, freight cars, and equipment totalling $740 million. If these assets had been recorded as capital leases, assume that assets and liabilities would have risen by approximately $740 million.
(a) Calculate CN’s debt to total assets ratio, first using the figures reported, and then after increasing assets and liabilities for the unrecorded operating leases.
(b) Discuss the potential effect of these operating leases on your assessment of CN’s solvency. *
BE10-13 Strite Company issues $2 million, 10-year, 7% bonds at 99, with interest payable on December 31. The straight-line method is used to amortize bond discount.
(a) Prepare the journal entry to record the sale of these bonds on January 1, 2012.
(b) Prepare the journal entry to record interest expense and bond discount amortization on December 31, 2012, assuming no previous accrual of interest. *
BE10-14 Reiden Inc. issues $4 million, 5-year, 8% bonds at 102, with interest payable on January 1. The straight-line method is used to amortize bond premium.
(a) Prepare the journal entry to record the sale of these bonds on January 1, 2012.
(b) Prepare the journal entry to record interest expense and bond premium amortization on December 31, 2012, assuming no previous accrual of interest. *
BE10-15 Presented below is the partial bond discount amortization schedule for Syam Corp., which uses the effective-interest method of amortization. Interest Bond Interest Interest to Expense to Discount Unamortized Carrying Periods Be Paid Be Recorded Amortization Discount Value Issue date $38,609 $961,391 1 $45,000 $48,070 $3,070 35,539 964,461 2 45,000 48,223 3,223 32,316 967,684

Instructions

(a) Prepare the journal entry to record the payment of interest and the discount amortization at the end of period 1.
(b) Explain why interest expense is greater than interest paid.
(c) Explain why interest expense will increase each period. Prepare statement presentation of long-term liabilities.   

BE10-16 Pickeril Inc. issues a $600,000, 10%, 10-year mortgage note on December 31, 2011, to obtain financing for a new building. The terms provide for semiannual installment payments of $48,145. Prepare the entry to record the mortgage loan on December 31, 2011, and the first installment payment.  (SO 7), AP Prepare liabilities section of balance sheet. (SO 7), AP Analyze solvency. (SO 7), AP Analyze solvency. (SO 7), AN Prepare journal entries for bonds issued at a discount. (SO 8), AP Prepare journal entries for bonds issued at a premium. (SO 8), AP Use effective-interest method of bond amortization. (SO 9), AP Exercises 545
10-1 You and several classmates are studying for the next accounting examination. They ask you to answer the following questions: 1. If cash is borrowed on a $60,000, 9-month, 10% note on August 1, how much interest expense would be incurred by December 31? 2. The cash register total including sales taxes is $42,000, and the sales tax rate is 5%. What is the sales taxes payable? 3. If $42,000 is collected in advance on November 1 for 6-month magazine subscriptions, what amount of subscription revenue is earned by December 31?
10-2 During the month of February, TriState Corporation’s employees earned wages of $74,000. Withholdings related to these wages were $4,200 for Social Security (FICA), $7,100 for federal income tax, and $1,900 for state income tax. Costs incurred for unemployment taxes were $110 for federal and $160 for state. Prepare the February 28 journal entries for
(a) wages expense and wages payable assuming that all February wages will be paid in March and
(b) the company’s payroll tax expense.
10-3 State whether each of the following statements is true or false.
______ 1. Convertible bonds are also known as callable bonds.
______ 2. The market rate is the rate investors demand for loaning funds.
______ 3. Semiannual interest on bonds is equal to the face value times the stated rate times 6/12.
______ 4. The present value of a bond is the value at which it should sell in the market.
10-4 Grenke Corporation issues $300,000 of bonds for $315,000.
(a) Prepare the journal entry to record the issuance of the bonds, and
(b) show how the bonds would be reported on the balance sheet at the date of issuance.
10-5 Hanrahan Corporation issued $400,000 of 10-year bonds at a discount. Prior to maturity, when the carrying value of the bonds was $388,000, the company retired the bonds at 99. Prepare the entry to record the redemption of the bonds. Answer questions about current liabilities. (SO 2, 3), C Prepare entries for payroll and payroll taxes. (SO 3), AP Evaluate statements about bonds. (SO 4), C Prepare journal entry for bond issuance and show balance sheet presentation. (SO 5), AP Prepare entry for bond redemption. (SO 6), AP

Exercises

E10-1 Megan Haak and Kathy Quandt borrowed $15,000 on a 7-month, 8% note from Golden State Bank to open their business, MK’s Coffee House. The money was borrowed on June 1, 2012, and the note matures January 1, 2013.

Instructions

(a) Prepare the entry to record the receipt of the funds from the loan.
(b) Prepare the entry to accrue the interest on June 30.
(c) Assuming adjusting entries are made at the end of each month, determine the balance in the interest payable account at December 31, 2012.
(d) Prepare the entry required on January 1, 2013, when the loan is paid back.
E10-2 On May 15, Gruzik’s Outback Clothiers borrowed some money on a 4-month note to provide cash during the slow season of the year. The interest rate on the note was 8%. At the time the note was due, the amount of interest owed was $480. Prepare entries for interestbearing notes. (SO 2), AP Do it! Do it! Do it! Do it! Do it! Do it! Review
 Prepare entries for long-term notes payable. (SO 10), AP Prepare entries for interestbearing notes. (SO 2), AP 546 chapter 10 Reporting and Analyzing Liabilities

Instructions

(a) Determine the amount borrowed by Gruzik.
(b) Assume the amount borrowed was $18,500. What was the interest rate if the amount of interest owed was $555?
(c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a).
E10-3 On June 1, Chetney Company Ltd. borrows $60,000 from First Bank on a 6-month, $60,000, 8% note. The note matures on December 1.

Instructions

(a) Prepare the entry on June 1.
(b) Prepare the adjusting entry on June 30.
(c) Prepare the entry at maturity (December 1), assuming monthly adjusting entries have been made through November 30.
(d) What was the total financing cost (interest expense)?
E10-4 In providing accounting services to small businesses, you encounter the following situations pertaining to cash sales. 1. Duvall Company rings up sales and sales taxes separately on its cash register. On April 10, the register totals are sales $22,000 and sales taxes $1,100. 2. Hubbard Company does not segregate sales and sales taxes. Its register total for April 15 is $13,780, which includes a 6% sales tax.

Instructions
 Prepare the entries to record the sales transactions and related taxes for
(a) Duvall Company and
(b) Hubbard Company.
E10-5 During the month of March, Lavonis Company’s employees earned wages of $64,000. Withholdings related to these wages were $4,896 for Social Security (FICA), $7,500 for federal income tax, $3,100 for state income tax, and $400 for union dues. The company incurred no cost related to these earnings for federal unemployment tax, but incurred $700 for state unemployment tax.

Instructions

(a) Prepare the necessary March 31 journal entry to record wages expense and wages payable. Assume that wages earned during March will be paid during April.
(b) Prepare the entry to record the company’s payroll tax expense.
E10-6 Season tickets for the Panthers are priced at $320 and include 16 games. Revenue is recognized after each game is played. When the season began, the amount credited to Unearned Ticket Revenue was $1,728,000. By the end of October, $1,188,000 of the Unearned Ticket Revenue had been recorded as earned.

Instructions

(a) How many season tickets did the Panthers sell?
(b) How many home games had the Panthers played by the end of October?
(c) Prepare the entry for the initial recording of the Unearned Ticket Revenue.
(d) Prepare the entry to recognize the revenue after the first home game had been played.
E10-7 Sprague Company Ltd. publishes a monthly sports magazine, Fishing Preview. Subscriptions to the magazine cost $28 per year. During November 2012, Sprague sells 6,300 subscriptions for cash, beginning with the December issue. Sprague prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Sales Revenue and Sales Revenue. The company has a December 31 year-end.

Instructions
 (a) Prepare the entry in November for the receipt of the subscriptions.
(b) Prepare the adjusting entry at December 31, 2012, to record subscription revenue earned in December 2012.
(c) Prepare the adjusting entry at March 31, 2013, to record subscription revenue earned in the first quarter of 2013.
E10-8 On August 1, 2012, Laduke Corporation issued $600,000, 7%, 10-year bonds at face value. Interest is payable annually on August 1. Laduke’s year-end is December 31. Prepare entries for interestbearing notes. (SO 2), AP Journalize sales and related taxes. (SO 3), AP Journalize payroll entries. (SO 3), AP Journalize unearned revenue transactions. (SO 3), AP Journalize unearned subscription revenue. (SO 3), AP Prepare journal entries for issuance of bonds and payment and accrual of interest. (SO 5), AP Exercises 547

Instructions
 Prepare journal entries to record the following events.
(a) The issuance of the bonds.
(b) The accrual of interest on December 31, 2012.
(c) The payment of interest on August 1, 2013.
E10-9 On January 1, Krivitz Company issued $300,000, 8%, 10-year bonds at face value. Interest is payable annually on January 1.

Instructions
 Prepare journal entries to record the following events.
(a) The issuance of the bonds.
(b) The accrual of interest on December 31.
(c) The payment of interest on January 1.
E10-10 Assume that the following are independent situations recently reported in the Wall Street Journal. 1. General Electric (GE) 7% bonds, maturing January 28, 2013, were issued at 111.12. 2. Boeing 7% bonds, maturing September 24, 2027, were issued at 99.08.

Instructions

(a) Were GE and Boeing bonds issued at a premium or a discount?
(b) Explain how bonds, both paying the same contractual interest rate, could be issued at different prices.
(c) Prepare the journal entry to record the issue of each of these two bonds, assuming each company issued $800,000 of bonds in total.
E10-11 Olstad Company issued $350,000 of 8%, 20-year bonds on January 1, 2012, at face value. Interest is payable annually on January 1.

Instructions
 Prepare the journal entries to record the following events.
(a) The issuance of the bonds.
(b) The accrual of interest on December 31, 2012.
(c) The payment of interest on January 1, 2013.
(d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.
E10-12 The situations presented here are independent of each other.

Instructions
 For each situation, prepare the appropriate journal entry for the redemption of the bonds.
(a) Martha Corporation retired $140,000 face value, 9% bonds on April 30, 2012, at 101. The carrying value of the bonds at the redemption date was $126,500. The bonds pay annual interest, and the interest payment due on April 30, 2012, has been made and recorded.
(b) Williams, Inc., retired $170,000 face value, 12.5% bonds on June 30, 2012, at 98. The carrying value of the bonds at the redemption date was $184,000. The bonds pay annual interest, and the interest payment due on June 30, 2012, has been made and recorded.
E10-13 Pedrick, Inc. reports the following liabilities (in thousands) on its January 31, 2012, balance sheet and notes to the financial statements. Accounts payable $4,263.9 Mortgage payable $6,746.7 Accrued pension liability 1,115.2 Operating leases 1,641.7 Unearned sales revenue 1,058.1 Notes payable (due in 2015) 335.6 Bonds payable 1,961.2 Salaries and wages payable 858.1 Current portion of Notes payable (due in 2013) 2,563.6 mortgage payable 1,992.2 Unused operating line of credit 3,337.6 Income taxes payable 265.2 Warranty liability—current 1,417.3

Instructions

(a) Identify which of the above liabilities are likely current and which are likely longterm. Say if an item fits in neither category. Explain the reasoning for your selection.
(b) Prepare the liabilities section of Pedrick’s balance sheet as at January 31, 2012. Prepare journal entries for issuance of bonds and payment and accrual of interest. (SO 5), AP Prepare entries for issue of bonds. (SO 5), AN Prepare journal entries to record issuance of bonds, payment of interest, and redemption at maturity. (SO 5, 6), AP Prepare journal entries for redemption of bonds. (SO 6), AP Prepare liabilities section of balance sheet. (SO 7), AP 548 chapter 10 Reporting and Analyzing Liabilities
E10-14 McDonald’s 2009 financial statements contain the following selected data (in millions). Current assets $ 3,416.3 Interest expense $ 473.2 Total assets 30,224.9 Income taxes 1,936.0 Current liabilities 2,988.7 Net income 4,551.0 Total liabilities 16,191.0

Instructions

(a) Compute the following values and provide a brief interpretation of each. (1) Working capital. (3) Debt to total assets ratio. (2) Current ratio. (4) Times interest earned ratio.
(b) The notes to McDonald’s financial statements show that subsequent to 2009 the company will have future minimum lease payments under operating leases of $10,717.5 million. If these assets had been purchased with debt, assets and liabilities would rise by approximately $8,800 million. Recompute the debt to total assets ratio after adjusting for this. Discuss your result.
E10-15 3M Company reported the following financial data for 2009 and 2008 (in millions). 3M COMPANY Balance Sheet (partial) 2009 2008 Current assets Cash and cash equivalents $ 3,040 $1,849 Accounts receivable, net 3,250 3,195 Inventories 2,639 3,013 Other current assets 1,866 1,541 Total current assets $10,795 $9,598 Current liabilities $ 4,897 $5,839

Instructions

(a) Calculate the current ratio for 3M for 2009 and 2008.
(b) Suppose that at the end of 2009, 3M management used $300 million cash to pay off $300 million of accounts payable. How would its current ratio change?
E10-16 Sportique Boutique reported the following financial data for 2012 and 2011. SPORTIQUE BOUTIQUE Balance Sheet (partial) September 30 (in thousands) 2012 2011 Current assets Cash and short-term deposits $2,574 $1,021 Accounts receivable 2,147 1,575 Inventories 1,201 1,010 Other current assets 322 192 Total current assets $6,244 $3,798 Current liabilities $4,503 $2,619

Instructions

(a) Calculate the current ratio for Sportique Boutique for 2012 and 2011.
(b) Suppose that at the end of 2012, Sportique Boutique used $1.5 million cash to pay off $1.5 million of accounts payable. How would its current ratio change?
(c) At September 30, Sportique Boutique has an undrawn operating line of credit of $12.5 million. Would this affect any assessment that you might make of Sportique Boutique’s short-term liquidity? Explain. Calculate current ratio before and after paying accounts payable. (SO 7), AN Calculate liquidity and solvency ratios; discuss impact of unrecorded obligations on liquidity and solvency. (SO 7), AP Calculate current ratio before and after paying accounts payable. (SO 7), AN Exercises 549
E10-17 A large retailer was sued nearly 5,000 times in a recent year—about once every two hours every day of the year. It has been sued for everything imaginable—ranging from falls on icy parking lots to injuries sustained in shoppers’ stampedes to a murder with a rifle purchased at one of its stores. The company reported the following in the notes to its financial statements:

Instructions

(a) Explain why the company does not have to record these contingent liabilities.
(b) Comment on any implications for analysis of the financial statements. *
E10-18 Sanidas Company issued $500,000, 6%, 30-year bonds on January 1, 2012, at 103. Interest is payable annually on January 1. Sanidas uses straight-line amortization for bond premium or discount.

Instructions
 Prepare the journal entries to record the following events.
(a) The issuance of the bonds.
(b) The accrual of interest and the premium amortization on December 31, 2012.
(c) The payment of interest on January 1, 2013.
(d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. *
E10-19 Gatlin Company issued $300,000, 8%, 15-year bonds on December 31, 2011, for $288,000. Interest is payable annually on December 31. Gatlin uses the straight-line method to amortize bond premium or discount.

Instructions
 Prepare the journal entries to record the following events.
(a) The issuance of the bonds.
(b) The payment of interest and the discount amortization on December 31, 2012.
(c) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. *
E10-20 Azen Corporation issued $400,000, 7%, 20-year bonds on January 1, 2012, for $360,727. This price resulted in an effective-interest rate of 8% on the bonds. Interest is payable annually on January 1. Azen uses the effective-interest method to amortize bond premium or discount.

Instructions
 Prepare the journal entries to record (round to the nearest dollar):
(a) The issuance of the bonds.
(b) The accrual of interest and the discount amortization on December 31, 2012.
(c) The payment of interest on January 1, 2013. *
E10-21 Perez Company issued $380,000, 7%, 10-year bonds on January 1, 2012, for $407,968. This price resulted in an effective-interest rate of 6% on the bonds. Interest is payable annually on January 1. Perez uses the effective-interest method to amortize bond premium or discount.

Instructions
 Prepare the journal entries (rounded to the nearest dollar) to record:
(a) The issuance of the bonds.
(b) The accrual of interest and the premium amortization on December 31, 2012.
(c) The payment of interest on January 1, 2013. *
E10-22 Kitov Co. receives $280,000 when it issues a $280,000, 6%, mortgage note payable to finance the construction of a building at December 31, 2012. The terms provide for semiannual installment payments of $14,285 on June 30 and December 31.

Instructions
 Prepare the journal entries to record the mortgage loan and the first two installment payments. The Company and its subsidiaries are involved from time to time in claims, proceedings, and litigation arising from the operation of its business. The Company does not believe that any such claim, proceeding, or litigation, either alone or in the aggregate, will have a material adverse effect on the Company’s financial position or results of its operations. Discuss contingent liabilities. (SO 7), C Prepare journal entries to record issuance of bonds, payment of interest, amortization of premium using straight-line, and redemption at maturity. (SO 5, 6, 8), AP Prepare journal entries to record issuance of bonds, payment of interest, amortization of discount using straight-line, and redemption at maturity. (SO 5, 6, 8), AP Prepare journal entries for issuance of bonds, payment of interest, and amortization of discount using effectiveinterest method. (SO 5, 9), AP Prepare journal entries for issuance of bonds, payment of interest, and amortization of premium using effectiveinterest method. (SO 5, 9), AP Prepare journal entries to record mortgage note and installment payments. (SO 10), AP 550 chapter 10 Reporting and Analyzing Liabilities *
E10-23 Berry Corporation issued a $50,000, 10%, 10-year installment note payable on January 1, 2012. Payments of $8,137 are made each January 1, beginning January 1, 2013.

Instructions

(a) What amounts should be reported under current liabilities related to the note on December 31, 2012?
(b) What should be reported under long-term liabilities? Exercises: Set B and Challenge Exercises Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Exercise Set B and Challenge Exercises. Problems: Set A
P10-1A On January 1, 2012, the ledger of Kindt Company contained these liability accounts. Accounts Payable $42,500 Sales Taxes Payable 6,600 Unearned Service Revenue 19,000 During January, the following selected transactions occurred. Jan. 1 Borrowed $18,000 in cash from Premier Bank on a 4-month, 5%, $18,000 note. 5 Sold merchandise for cash totaling $6,254, which includes 6% sales taxes. 12 Provided services for customers who had made advance payments of $10,000. (Credit Service Revenue.) 14 Paid state treasurer’s department for sales taxes collected in December 2011, $6,600. 20 Sold 500 units of a new product on credit at $48 per unit, plus 6% sales tax. During January, the company’s employees earned wages of $70,000. Withholdings related to these wages were $5,355 for Social Security (FICA), $5,000 for federal income tax, and $1,500 for state income tax. The company owed no money related to these earnings for federal or state unemployment tax. Assume that wages earned during January will be paid during February. No entry had been recorded for wages or payroll tax expense as of January 31.

Instructions

(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for the outstanding note payable and for wages expense and payroll tax expense.
(c) Prepare the current liabilities section of the balance sheet at January 31, 2012. Assume no change in Accounts Payable.
P10-2A Connor Corporation sells rock-climbing products and also operates an indoor climbing facility for climbing enthusiasts. During the last part of 2012, Connor had the following transactions related to notes payable. Sept. 1 Issued a $12,000 note to Patrick to purchase inventory. The 3-month note payable bears interest of 6% and is due December 1. (Connor uses a perpetual inventory system.) Sept. 30 Recorded accrued interest for the Patrick note. Oct. 1 Issued a $16,500, 8%, 4-month note to Canton Bank to finance the purchase of a new climbing wall for advanced climbers. The note is due February 1. Oct. 31 Recorded accrued interest for the Patrick note and the Canton Bank note. Prepare current liability entries, adjusting entries, and current liabilities section. (SO 1, 2, 3, 7), AP Journalize and post note transactions; show balance sheet presentation. (SO 2, 7), AP
(c) Tot. current liabilities $146,724 Balance sheet presentation of installment note payable. (SO 10), AP Problems: Set A 551 Nov. 1 Issued a $26,000 note and paid $8,000 cash to purchase a vehicle to transport clients to nearby climbing sites as part of a new series of climbing classes. This note bears interest of 6% and matures in 12 months. Nov. 30 Recorded accrued interest for the Patrick note, the Canton Bank note, and the vehicle note. Dec. 1 Paid principal and interest on the Patrick note. Dec. 31 Recorded accrued interest for the Canton Bank note and the vehicle note.

Instructions

(a) Prepare journal entries for the transactions noted above.
(b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense accounts. (Use T accounts.)
(c) Show the balance sheet presentation of notes payable and interest payable at December 31.
(d) How much interest expense relating to notes payable did Connor incur during the year?
P10-3A The following section is taken from Paynter balance sheet at December 31, 2011. Current liabilities Interest payable $ 40,000 Long-term liabilities Bonds payable (8%, due January 1, 2015) 500,000 Interest is payable annually on January 1. The bonds are callable on any annual interest date.

Instructions

(a) Journalize the payment of the bond interest on January 1, 2012.
(b) Assume that on January 1, 2012, after paying interest, Paynter calls bonds having a face value of $200,000. The call price is 103. Record the redemption of the bonds.
(c) Prepare the adjusting entry on December 31, 2012, to accrue the interest on the remaining bonds.
P10-4A On October 1, 2011, Huber Corp. issued $700,000, 5%, 10-year bonds at face value. The bonds were dated October 1, 2011, and pay interest annually on October 1. Financial statements are prepared annually on December 31.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds.
(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2011.
(c) Show the balance sheet presentation of bonds payable and bond interest payable on December 31, 2011.
(d) Prepare the journal entry to record the payment of interest on October 1, 2012. (e) Prepare the adjusting entry to record the accrual of interest on December 31, 2012. (f ) Assume that on January 1, 2013, Huber pays the accrued bond interest and calls the bonds. The call price is 104. Record the payment of interest and redemption of the bonds.
P10-5A Paprocki Company sold $6,000,000, 7%, 15-year bonds on January 1, 2012. The bonds were dated January 1, 2012, and pay interest on December 31. The bonds were sold at 98.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2012.
(b) At December 31, 2012, $8,000 of the bond discount had been amortized. Show the long-term liability balance sheet presentation of the bond liability at December 31, 2012.
(c) At January 1, 2014, when the carrying value of the bonds was $5,896,000, the company redeemed the bonds at 102. Record the redemption of the bonds assuming that interest for the year had already been paid.
P10-6A You have been presented with selected information taken from the financial statements of Southwest Airlines Co., shown on the next page. Prepare journal entries to record interest payments and redemption of bonds. (SO 5, 6), AP Prepare journal entries to record issuance of bonds, interest, balance sheet presentation, and bond redemption. (SO 5, 6, 7), AP Prepare journal entries to record issuance of bonds, show balance sheet presentation, and record bond redemption. (SO 5, 6, 7), AP
(c) Loss $224,000
(b) Interest Payable $590 (f) Loss $28,000 Calculate and comment on ratios. (SO 7), AN
(b) Loss $6,000 552 chapter 10 Reporting and Analyzing Liabilities

Instructions

(a) Calculate each of the following ratios for 2008 and 2007. (1) Current ratio. (2) Free cash flow. (3) Debt to total assets. (4) Times interest earned ratio.
(b) Comment on the trend in ratios.
(c) Read the company’s note on leases. If the operating leases had instead been accounted for like a purchase, assets and liabilities would increase by approximately $1,600 million. Recalculate the debt to total assets ratio for 2008 in light of this information, and discuss the implictions for analysis. *
P10-7A The following information is taken from Lima Corp.’s balance sheet at December 31, 2011. Current liabilities Interest payable $ 96,000 Long-term liabilities Bonds payable (4%, due January 1, 2022) $2,400,000 Less: Discount on bonds payable 24,000 2,376,000 Interest is payable annually on January 1. The bonds are callable on any annual interest date. Lima uses straight-line amortization for any bond premium or discount. From December 31, 2011, the bonds will be outstanding for an additional 10 years (120 months).

Instructions
 (Round all computations to the nearest dollar.)
(a) Journalize the payment of bond interest on January 1, 2012.
(b) Prepare the entry to amortize bond discount and to accrue the interest on December 31, 2012. Prepare journal entries to record interest payments, straight-line discount amortization, and redemption of bonds. (SO 5, 6, 8), AP SOUTHWEST AIRLINES CO. Balance Sheet (partial) December 31 (in millions) 2008 2007 Total current assets $ 2,893 $ 4,443 Noncurrent assets 11,415 12,329 Total assets $14,308 $16,772 Current liabilities $ 2,806 $ 4,836 Long-term liabilities 6,549 4,995 Total liabilities 9,355 9,831 Shareholders’ equity 4,953 6,941 Total liabilities and shareholders’ equity $14,308 $16,772 Other information: 2008 2007 Net income (loss) $ 178 $ 645 Income tax expense 100 413 Interest expense 130 119 Cash provided by operations (1,521) 2,845 Capital expenditures 923 1,331 Cash dividends 13 14 Note 8. Leases The majority of the Company’s terminal operations space, as well as 82 aircraft, were under operating leases at December 31, 2008. Future minimum lease payments under noncancelable operating leases are as follows: 2009, $376,000; 2010, $324,000; 2011, $249,000; 2012, $208,000; 2013, $152,000; after 2013, $728,000. Problems: Set A 553
(c) Assume on January 1, 2013, after paying interest, that Lima Corp. calls bonds having a face value of $400,000. The call price is 102. Record the redemption of the bonds.
(d) Prepare the adjusting entry at December 31, 2013, to amortize bond discount and to accrue interest on the remaining bonds. *
P10-8A Wong Corporation sold $2,000,000, 7%, 5-year bonds on January 1, 2012. The bonds were dated January 1, 2012, and pay interest on January 1. Wong Corporation uses the straight-line method to amortize bond premium or discount.

Instructions

(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for 2012, assuming that the bonds sold at 102.
(b) Prepare journal entries as in part
(a) assuming that the bonds sold at 97.
(c) Show the balance sheet presentation for the bond issue at December 31, 2012, using (1) the 102 selling price, and then (2) the 97 selling price. *
P10-9A Trinh Co. sold $3,000,000, 8%, 10-year bonds on January 1, 2012. The bonds were dated January 1, 2012, and pay interest on January 1. The company uses straightline amortization on bond premiums and discounts. Financial statements are prepared annually.

Instructions

(a) Prepare the journal entries to record the issuance of the bonds assuming they sold at: (1) 103. (2) 98.
(b) Prepare amortization tables for both assumed sales for the first three interest payments.
(c) Prepare the journal entries to record interest expense for 2012 under both of the bond issuances assumed in part (a).
(d) Show the long-term liabilities balance sheet presentation for both of the bond issuances assumed in part
(a) at December 31, 2012. *
P10-10A On January 1, 2012, Ross Corporation issued $1,800,000 face value, 5%, 10- year bonds at $1,667,518. This price resulted in an effective-interest rate of 6% on the bonds. Ross uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest January 1.

Instructions
 (Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2012.
(b) Prepare an amortization table through December 31, 2014 (three interest periods) for this bond issue.
(c) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2012.
(d) Prepare the journal entry to record the payment of interest on January 1, 2013. (e) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2013. *
P10-11A On January 1, 2012, Lehn Company issued $2,000,000 face value, 7%, 10-year bonds at $2,147,202. This price resulted in a 6% effective-interest rate on the bonds. Lehn uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1.

Instructions

(a) Prepare the journal entries to record the following transactions. (1) The issuance of the bonds on January 1, 2012. (2) Accrual of interest and amortization of the premium on December 31, 2012. (3) The payment of interest on January 1, 2013. (4) Accrual of interest and amortization of the premium on December 31, 2013.
(b) Show the proper long-term liabilities balance sheet presentation for the liability for bonds payable at December 31, 2013.
(c) Provide the answers to the following questions in narrative form. (1) What amount of interest expense is reported for 2013? (2) Would the bond interest expense reported in 2013 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation. (SO 5, 7, 8), AP Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation. (SO 5, 7, 8), AP Prepare journal entries to record issuance of bonds, payment of interest, and amortization of bond discount using effectiveinterest method. (SO 5, 9), AP Prepare journal entries to record issuance of bonds, payment of interest, and effective-interest amortization, and balance sheet presentation. (SO 5, 7, 9), AP
(c) Interest Expense $100,051
(a) (4) Interest Expense $128,162
(c) Loss $11,600
(c) (2) 12/31/12 Interest Expense $246,000 554 chapter 10 Reporting and Analyzing Liabilities *
P10-12A Durango purchased a new piece of equipment to be used in its new facility. The $370,000 piece of equipment was purchased with a $50,000 down payment and with cash received through the issuance of a $320,000, 8%, 3-year mortgage note payable issued on October 1, 2012. The terms provide for quarterly installment payments of $30,259 on December 31, March 31, June 30, and September 30.

Instructions
 (Round all computations to the nearest dollar.)
(a) Prepare an installment payments schedule for the first five payments of the notes payable.
(b) Prepare the journal entry related to the notes payable for December 31, 2012.
(c) Show the balance sheet presentation for this obligation for December 31, 2012. (Hint: Be sure to distinguish between the current and long-term portions of the note.) *
P10-13A Beryl Forman has just approached a venture capitalist for financing for her new business venture, the development of a local ski hill. On July 1, 2011, Beryl was loaned $150,000 at an annual interest rate of 7%. The loan is repayable over 5 years in annual installments of $36,584, principal and interest, due each June 30. The first payment is due June 30, 2012. Beryl uses the effective-interest method for amortizing debt. Her ski hill company’s year-end will be June 30.

Instructions

(a) Prepare an amortization schedule for the 5 years, 2011–2016. Round all calculations to the nearest dollar.
(b) Prepare all journal entries for Beryl Forman for the first 2 fiscal years ended June 30, 2012, and June 30, 2013. Round all calculations to the nearest dollar.
(c) Show the balance sheet presentation of the note payable as of June 30, 2013. (Hint: Be sure to distinguish between the current and long-term portions of the note.) Prepare journal entries to record payments for longterm note payable, and balance sheet presentation. (SO 7, 10), AP
(c) Current portion $100,304
(b) 6/30/12 Interest Expense $10,500 Prepare installment payments schedule, journal entries, and balance sheet presentation for a mortgage note payable. (SO 7, 10), AP Problems: Set B
P10-1B On January 1, 2012, the ledger of Fleming Company contained the following liability accounts. Accounts Payable $52,000 Sales Taxes Payable 8,200 Unearned Service Revenue 11,000 During January, the following selected transactions occurred. Jan. 1 Borrowed $18,000 from TriCounty Bank on a 3-month, 7%, $18,000 note. 5 Sold merchandise for cash totaling $18,480, which includes 5% sales taxes. 12 Provided services for customers who had made advance payments of $8,000. (Credit Service Revenue.) 14 Paid state revenue department for sales taxes collected in December 2011 ($8,200). 20 Sold 500 units of a new product on credit at $50 per unit, plus 5% sales tax. During January, the company’s employees earned wages of $54,000. Withholdings related to these wages were $4,131 for Social Security (FICA), $3,900 for federal income tax, and $1,200 for state income tax. The company owed no money related to these earnings for federal or state unemployment tax. Assume that wages earned during January will be paid during February. No entry had been recorded for wages or payroll tax expense as of January 31.

Instructions

(a) Journalize the January transactions.
(b) Journalize the adjusting entries at January 31 for the outstanding notes payable and for wages expense and payroll tax expense.
(c) Prepare the current liabilities section of the balance sheet at January 31, 2012. Assume no change in accounts payable. Prepare current liability entries, adjusting entries, and current liabilities section. (SO 1, 2, 3, 7), AP
(c) Tot. current liabilities $133,366 Problems: Set B 555
P10-2B Majestic Mountain Bikes markets mountain-bike tours to clients vacationing in various locations in the mountains of Colorado. In preparation for the upcoming summer biking season, Majestic entered into the following transactions related to notes payable. Mar. 1 Purchased Puma bikes for use as rentals by issuing a $9,000, 3-month, 6% note payable that is due June 1. Mar. 31 Recorded accrued interest for the Puma note. Apr. 1 Issued a $45,000 9-month note for the purchase of mountain property on which to build bike trails. The note bears 8% interest and is due January 1. Apr. 30 Recorded accrued interest for the Puma note and the land note. May 1 Issued a 4-month note to Jackson State Bank for $12,000 at 6%. The funds will be used for working capital for the beginning of the season; the note is due September 1. May 31 Recorded accrued interest for all three notes. June 1 Paid principal and interest on the Puma note. June 30 Recorded accrued interest for the land note and the Jackson State Bank note.

Instructions

(a) Prepare journal entries for the transactions noted above.
(b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense accounts. (Use T accounts.)
(c) Assuming that Majestic’s year-end is June 30, show the balance sheet presentation of notes payable and interest payable at that date.
(d) How much interest expense relating to notes payable did Majestic incur during the year?
P10-3B The following section is taken from Lois Corp.’s balance sheet at December 31, 2011. Current liabilities Interest payable $ 84,000 Long-term liabilities Bonds payable (7%, due January 1, 2016) 1,200,000 Interest is payable annually on January 1. The bonds are callable on any annual interest date.

Instructions

(a) Journalize the payment of the bond interest on January 1, 2012.
(b) Assume that on January 1, 2012, after paying interest, Lois Corp. calls bonds having a face value of $300,000. The call price is 104. Record the redemption of the bonds.
(c) Prepare the adjusting entry on December 31, 2012, to accrue the interest on the remaining bonds.
P10-4B On April 1, 2011, CMV Corp. issued $600,000, 8%, 5-year bonds at face value. The bonds were dated April 1, 2011, and pay interest annually on April 1. Financial statements are prepared annually on December 31.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds.
(b) Prepare the adjusting entry to record the accrual of interest on December 31, 2011.
(c) Show the balance sheet presentation of bonds payable and bond interest payable on December 31, 2011.
(d) Prepare the journal entry to record the payment of interest on April 1, 2012. (e) Prepare the adjusting entry to record the accrual of interest on December 31, 2012. (f ) Assume that on January 1, 2013, CMV pays the accrued bond interest and calls the bonds. The call price is 103. Record the payment of interest and redemption of the bonds.
P10-5B Crescent Electric sold $5,000,000, 9%, 10-year bonds on January 1, 2012. The bonds were dated January 1 and pay interest on January 1. The bonds were sold at 103.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2012.
(b) At December 31, 2012, $15,000 of the bond premium had been amortized. Show the long-term liability balance sheet presentation of the bond liability at December 31, 2012. Journalize and post note transactions; show balance sheet presentation. (SO 2, 7), AP
(b) Interest Payable $1,020
(b) Loss $12,000 Prepare journal entries to record interest payments and redemption of bonds. (SO 5, 6), AP Prepare journal entries to record issuance of bonds, interest, balance sheet presentation, and bond redemption. (SO 5, 6, 7), AP (f) Loss 18,000 Prepare journal entries to record issuance of bonds, show balance sheet presentation, and record bond redemption. (SO 5, 6, 7), AP 556 chapter 10 Reporting and Analyzing Liabilities
(c) At January 1, 2014, when the carrying value of the bonds was $5,120,000, the company redeemed the bonds at 104. Record the redemption of the bonds assuming that interest for the year had already been paid.
P10-6B The following selected information was taken from the financial statements of Krispy Kreme Doughnuts, Inc. Rent expense, net of rental income, totaled $9.6 million in fiscal 2010, $11.8 million in fiscal 2009 and $14.8 million in fiscal 2008.

Instructions

(a) Calculate each of the following ratios for 2010 and 2009. (1) Current ratio. (2) Free cash flow. (3) Debt to total assets ratio.
(b) Comment on Krispy Kreme’s liquidity and solvency.
(c) Loss $80,000 Calculate and comment on ratios. (SO 7), AN KRISPY KREME DOUGHNUTS, INC. Balance Sheet (partial) (in thousands) Jan. 31, 2010 Feb. 1, 2009 Total current assets $ 59,223 $ 75,806 Capital assets and other long-term assets 106,053 119,120 $165,276 $194,926 Current liabilities $ 37,673 $ 39,616 Long-term liabilities 64,836 97,555 Total liabilities 102,509 137,171 Shareholders’ equity 62,767 57,755 Total liabilities and shareholders’ equity $165,276 $194,926 Other information: 2010 2009 Interest expense $ 10,685 $ 10,679 Tax expense (benefit) 575 (503) Net loss (157) (4,061) Cash provided by operations 19,827 16,593 Capital expenditures 7,967 4,694 Cash dividends -0- -0- Note 10. Leases The Company leases equipment and facilities under both capital and operating leases. The approximate future minimum lease payments under non-cancelable (operating) leases as of January 31, 2010, are set forth in the following table: Amount Fiscal Year Ending in (in thousands) 2011 $ 8,866 2012 7,972 2013 6,769 2014 5,830 2015 5,420 Thereafter 56,667 $91,524 Problems: Set B 557
(c) Read the company’s note on leases (Note 10). If the operating leases had instead been accounted for like a purchase, assets and liabilities would have increased by approximately $68,000,000. Recalculate the debt to total assets ratio for 2010 and discuss the implications for analysis. *
P10-7B The following section is taken from Centralia Oil Company’s balance sheet at December 31, 2011. Current liabilities Interest payable $ 216,000 Long-term liabilities Bonds payable (6%, due January 1, 2022) $3,600,000 Add: Premium on bonds payable 280,000 3,880,000 Interest is payable annually on January 1. The bonds are callable on any annual interest date. Centralia uses straight-line amortization for any bond premium or discount. From December 31, 2011, the bonds will be outstanding for an additional 10 years (120 months).

Instructions
 (Round all computations to the nearest dollar.)
(a) Journalize the payment of bond interest on January 1, 2012.
(b) Prepare the entry to amortize bond premium and to accrue interest due on December 31, 2012.
(c) Assume on January 1, 2013, after paying interest, that Centralia Company calls bonds having a face value of $1,800,000. The call price is 102. Record the redemption of the bonds.
(d) Prepare the adjusting entry at December 31, 2013, to amortize bond premium and to accrue interest on the remaining bonds. *
P10-8B Champeau Company sold $2,500,000, 8%, 25-year bonds on January 1, 2012. The bonds were dated January 1, 2012, and pay interest on January 1. Champeau Company uses the straight-line method to amortize bond premium or discount.

Instructions

(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for 2012, assuming that the bonds sold at 102.
(b) Prepare journal entries as in part
(a) assuming that the bonds sold at 96.
(c) Show the balance sheet presentation for the bond issue at December 31, 2012, using (1) the 102 selling price, and then (2) the 96 selling price. *
P10-9B Marini Corporation sold $2,600,000, 9%, 20-year bonds on December 31, 2011. The bonds were dated December 31, 2011, and pay interest on December 31. The company uses straight-line amortization for premiums and discounts. Financial statements are prepared annually.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds assuming they sold at: (1) 98. (2) 104.
(b) Prepare amortization tables for both of the assumed sales for the first three interest payments.
(c) Prepare the journal entries to record interest expense for the first two interest payments under both of the bond issuances assumed in part (a).
(d) Show the long-term liabilities balance sheet presentation for both of the bond issuances assumed in part
(a) at December 31, 2012. *
P10-10B On January 1, 2012, Pedraza Corporation issued $1,000,000 face value, 6%, 10-year bonds at $1,077,217. This price resulted in an effective-interest rate of 5% on the bonds. Pedraza uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest January 1.

Instructions
 (Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2012.
(b) Prepare an amortization table through December 31, 2014 (three interest periods) for this bond issue. Prepare journal entries to record interest payments, straight-line premium amortization, and redemption of bonds (SO 5, 6, 8), AP
(c) Gain $90,000 Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation. (SO 5, 7, 8), AP Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation. (SO 5, 7, 8), AP
(c) (2) 12/31/12 Interest Expense $228,800 Prepare journal entries to record issuance of bonds, payment of interest, and amortization of bond premium using effectiveinterest method. (SO 5, 9), AP 558 chapter 10 Reporting and Analyzing Liabilities
(c) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2012.
(d) Prepare the journal entry to record the payment of interest on January 1, 2013. (e) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2013. *
P10-11B On January 1, 2012, Witzling Company issued $4,000,000 face value, 8%, 15-year bonds at $3,391,514. This price resulted in an effective-interest rate of 10% on the bonds. Witzling uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest January 1.

Instructions

(a) Prepare the journal entries to record the following transactions. (1) The issuance of the bonds on January 1, 2012. (2) The accrual of interest and the amortization of the discount on December 31, 2012. (3) The payment of interest on January 1, 2013. (4) The accrual of interest and the amortization of the discount on December 31, 2013.
(b) Show the proper long-term liabilities balance sheet presentation for the liability for bonds payable at December 31, 2013.
(c) Provide the answers to the following questions in narrative form. (1) What amount of interest expense is reported for 2013? (2) Would the bond interest expense reported in 2013 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? (3) Determine the total cost of borrowing over the life of the bond. (4) Would the total bond interest expense be greater than, the same as, or less than the total interest expense that would be reported if the straight-line method of amortization were used? *
P10-12B Daisy Corporation purchased a new piece of equipment to be used in its new facility. The $450,000 piece of equipment was purchased with a $50,000 down payment and with cash received through the issuance of a $400,000, 6%, 5-year mortgage note payable issued on October 1, 2012. The terms provide for quarterly installment payments of $23,298 on December 31, March 31, June 30, and September 30.

Instructions
 (Round all computations to the nearest dollar.)
(a) Prepare an installment payments schedule for the first five payments of the notes payable.
(b) Prepare the journal entry related to the notes payable for December 31, 2012.
(c) Show the balance sheet presentation for these obligations for December 31, 2012. (Hint: Be sure to distinguish between the current and long-term portions of the note.) *
P10-13B Scott Robertson has just approached a venture capitalist for financing for his sailing school. The venture capitalist is willing to loan Scott $90,000 at a high-risk annual interest rate of 18%. The loan is payable over 2 years in monthly installments of $4,493. Each payment includes principal and interest, calculated using the effectiveinterest method for amortizing debt. Scott receives the loan on May 1, 2012, which is the first day of his fiscal year. Scott makes the first payment on May 31, 2012.

Instructions

(a) Prepare an amortization schedule for the period from May 1, 2012, to August 31, 2012. Round all calculations to the nearest dollar.
(b) Prepare all journal entries for Scott Robertson for the period beginning May 1, 2012, and ending July 31, 2012. Round all calculations to the nearest dollar.
(c) Interest Expense $53,861 Prepare journal entries to record issuance of bonds, payment of interest, and effective-interest amortization, and balance sheet presentation. (SO 5, 7, 9), AP
(c) (1) $341,067 Prepare installment payments schedule, journal entries, and balance sheet presentation for a mortgage note payable. (SO 7, 10), AP
(b) Interest Expense $6,000 Prepare journal entries to record payments for longterm note payable. (SO 10), AP
(b) 6/30 Interest Expense $1,303 Problems: Set C Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Problem Set C.

Continuing Cookie Chronicle 559
Comprehensive Problem CP10 Markel Corporation’s balance sheet at December 31, 2011, is presented below. MARKEL CORPORATION Balance Sheet December 31, 2011 Cash $ 30,000 Accounts payable $ 13,750 Inventory 30,750 Interest payable 2,500 Prepaid insurance 5,600 Bonds payable 50,000 Equipment 38,000 Common stock 25,000 $104,350 Retained earnings $ 13,100 $104,350 During 2012, the following transactions occurred. 1. Markel paid $2,500 interest on the bonds on January 1, 2012. 2. Markel purchased $241,100 of inventory on account. 3. Markel sold for $480,000 cash inventory which cost $265,000. Markel also collected $28,800 sales taxes. 4. Markel paid $230,000 on accounts payable. 5. Markel paid $2,500 interest on the bonds on July 1, 2012. 6. The prepaid insurance ($5,600) expired on July 31. 7. On August 1, Markel paid $10,200 for insurance coverage from August 1, 2012, through July 31, 2013. 8. Markel paid $17,000 sales taxes to the state. 9. Paid other operating expenses, $91,000. 10. Retired the bonds on December 31, 2012, by paying $48,000 plus $2,500 interest. 11. Issued $90,000 of 8% bonds on December 31, 2012, at 103. The bonds pay interest every June 30 and December 31. Adjustment data: 1. Recorded the insurance expired from item 7. 2. The equipment was acquired on December 31, 2011, and will be depreciated on a straight-line basis over 5 years with a $3,000 salvage value. 3. The income tax rate is 30%. (Hint: Prepare the income statement up to income before taxes and multiply by 30% to compute the amount.)