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Chapter 10 8-A a. Current liabilities: Unearned revenue .. $ Notes payable (current portion) .. Accrued bond interest payable .

Income Taxes payable . Total current liabilities .. $

300,000 10,000 36,000 100,000 446,000

b.

Long-term liabilities: $ 70,000 Notes payable ($80,000 - $10,000) Bonds payable 900,000 Notes payable to be refinanced on a long-term basis . 75,000 Deferred Income Taxes . 85,000 Total long-term liabilities .. $ 1,130,000 The interest expense that will arise from existing obligations is not yet a liability. The lawsuit pending against the company is a loss contingency. It should be disclosed, but no liability is recorded as no reasonable estimate can be made of the dollar amount. The 3-year salary commitment relates to future transactions and, therefore, is not yet a liability of the company.

PROBLEM 10.2A SEATTLE CHOCOLATES


a.
SEATTLE CHOCOLATES Partial Balance Sheet December 31, 2007
Liabilities: Current liabilities: Income taxes payable Accrued expenses and payroll taxes Mortgage note payable-current portion ( $750,000 - $739,000) Accrued interest on mortgage note payable Trade accounts payable Unearned revenue Total current liabilities

40,000 60,000 11,000 5,000 250,000 15,000 381,000

Long-term liabilities: Note payable to Northwest Bank Mortgage note payable ( $750,000 - $11,000 current portion) Total long-term liabilities Total liabilities

500,000 739,000 1,239,000 1,620,000

b. Comments on information in the numbered paragraphs: (1) Although the note payable to Northwest Bank is due in 60 days, it is classified as a long-term liability because it is to be refinanced on a long-term basis. (2) The $11,000 principal amount of the mortgage note payable scheduled for repayment in 2006 ($750,000 - $739,000) is classified as a current liability. Principal to be repaid after December 31, 2008, is classified as a long-term liability. (3) As the accrued interest is payable within one month, it is a current liability. (4) The pending lawsuit is a loss contingency. As no reasonable estimate can be made of the loss incurred (if any), this loss contingency does not meet the criteria for accrual. It will be disclosed in the notes accompanying the financial statements, but it should not be shown as a liability.

PROBLEM 10.3A SWANSON CORPORATION


a.
General Journal 20__ Aug 6 Cash Notes Payable Borrowed $12,000 @ 12% per annum from Maple Grove Bank. Issued a 45-day promissory note. Sept 16 Office Equipment Notes Payable Issued 3-month, 10% note to Seawald Equipment as payment for office equipment. 20 Notes Payable Interest Expense Cash Paid note and interest to Maple Grove Bank ($12,000 x 12% x 45/360 = $180). 1 Cash Notes Payable Obtained 90-day loan from Mike Swanson; interest @ 15% per annum. Dec 1 Inventory Notes Payable To record purchase of merchandise and issue 90-day, 14% note payable to Gathman Corporation. 16 Notes Payable Interest Expense Cash Notes Payable Paid note and interest to Seawald Equipment which matured today and issued a 30-day, 16% renewal note. Interest: $18,000 x 10% x 3/12 = $450 Adjusting Entry 31 Interest Expense Interest Payable To record interest accrued on notes payable:
Mike Swanson ($250,000 x 15% x 2/12 = $6,250); Gathman Corp. ($5,000 x 14% x 1/12 = $58); and Seawald Equipment ($18,000x16%x1/12 1/2 =$120).

12,000 12,000

18,000 18,000

Sept

12,000 180 12,180

Nov

250,000 250,000

5,000 5,000

Dec

18,000 450 450 18,000

b.
Dec

6,428 6,428

c.

The Seawald Equipment note dated September 16 was due in full on December 16. The higher rate of interest on the new note may be associated with the increased risk of collecting in 30 days the $18,000 principal plus accrued interest due.

PROBLEM 10.4A QUICK LUBE (concluded)


b.
General Journal 2007 Oct 1 Interest Expense Mortgage Note Payable Cash To record monthly payment on mortgage. Nov 1 Interest Expense Mortgage Note Payable Cash To record monthly mortgage payment.

10,800 310 11,110

10,797 313 11,110

c.
Amortization Table (12%, 30-Year Mortgage Note Payable for $1,080,000; Payable in 360 Monthly Installments of $11,110) Reduction in Payment Monthly Interest Unpaid Date Payment Expense Balance Sept. 1, 2007 Oct. 1 $ 11,110 $ 10,800 $ 310 Nov. 1 11,110 10,797 313 Dec. 1 11,110 10,794 316 Jan. 1, 2008 11,110 10,791 319

Interest Period Issue date 1 2 3 4

Unpaid Balance 1,080,000 1,079,690 1,079,377 1,079,061 1,078,742

PROBLEM 10.6A PARK RAPIDS LUMBER COMPANY


a.
General Journal
(1) Bonds issued at 98: 2007 Dec 31 Bond Interest Expense Discount on Bonds Payable Bond Interest Payable To record accrual of bond interest expense for four months in 2007: Contract interest ($80,000,000 x 10% x 4/12) Discount amortization ($1,600,000 20 years) x 4/12 Bond interest expense for four months

2,693,334 26,667 2,666,667

$ $

2,666,667 26,667 2,693,334

2008 Mar 1 Bond Interest Payable Bond Interest Expense Discount on Bonds Payable Cash To record semiannual bond interest payment and interest expense for two months (1/2 of interest for four months, as computed in preceding entry). * (2) Bonds issued at 101:

2,666,667 1,346,667 13,334 4,000,000

2007 Dec 31 Bonds Interest Expense Premium on Bonds Payable Bond Interest Payable Accrual of interest on bonds for four months: Contract interest ($80,000,000 x 10% x 4/12) Less: Premium amortization ($800,000 20 yrs) x 4/12 Bond interest expense for four months 2008 Mar 1 Bond Interest Payable Bond Interest Expense Premium on Bonds Payable Cash Semiannual bond interest payment and interest expense for two months (1/2 of interest for four months, as computed in preceding entry).* * Actual amount differs slightly due to rounding errors.

2,653,334 13,333 2,666,667 $ $ 2,666,667 (13,333) 2,653,334

2,666,667 1,326,667 6,666 4,000,000

b.
Net bond liability at Dec. 31, 2008: Bonds Issued at 98 80,000,000 $ (1,493,333) 78,506,667 $ Bonds Issued at 101 80,000,000 746,667 80,746,667

Bond payable * Less: Discount on bonds payable ($1,600,000-$106,667) ** Add: Premium on bonds payable ($800,000-$53,333) Net bond liability at Dec. 31, 2008:

* Discount amortized at Dec. 31, 2008: Amount amortized in 2007 $ 26,667 Amount amortized in 2008 ($1,600,000 20 years) .. 80,000 Discount Discount amortized amortized at 12/31/06 at 12/31/08 . $ 106,667 ** Premium amortized at Dec. 31, 2008: Amount amortized in 2007 . $ 13,333 Amount amortized in 2008 ($800,000 20 years) 40,000 Premium amortized at 12/31/08 .. $ 53,333 c. The effective rate of interest would be higher under assumption 1. The less that investors pay for bonds with a given contract rate of interest, the higher the effective interest rate they will earn.

PROBLEM 10.3B SWANLEE CORPORATION


a.
General Journal 20__ Jul 1 Cash Notes Payable Borrowed $20,000 @ 12% per annum from Weston Bank. Issued a 90-day promissory note. Sept 16 Office Equipment Notes Payable Issued 3-month, 10% note to Moontime Equipment as payment for office equipment. 1 Notes Payable Interest Expense Cash Paid note and interest to Weston Bank ($20,000 x 12% x 90/360 = $600). 1 Cash Notes Payable Obtained 120-day loan from Jean Will; interest @ 9% per annum. Dec 1 Inventory Notes Payable To record purchase of merchandise and issue 90-day, 12% note payable to Listen Corporation. 16 Notes Payable Interest Expense Cash Notes Payable Paid note and interest to Moontime Equipment which matured today and issued a 60-day, 16% renewal note. Interest: $30,000 x 10% x 3/12 = $750. Adjusting Entry 31 Interest Expense Interest Payable To record interest accrued on notes payable:
Jean Will ($100,000 x 9% x 1/12 = $750); Listen Corp. ($10,000 x 12% x 1/12 = $100); and Moontime Equipment ($30,000 x 16% x 1/12 x 1/2 = $200).

20,000 20,000

30,000 30,000

Oct

20,000 600 20,600

Dec

100,000 100,000

10,000 10,000

Dec

30,000 750 750 30,000

b. Dec

1,050 1,050

c.

The Moontime Equipment note dated September 16 was due in full on December 16. The higher rate of interest on the new note may be associated with the increased risk of collecting in 60 days the $30,000 principal plus accrued interest due.

PROBLEM 10.6B BELLA COMPANY


a.
General Journal (1) Bonds issued at 98: 2007 Dec 31 Bond Interest Expense Discount on Bonds Payable Bond Interest Payable To record accrual of bond interest expense for four months in 2007: Contract interest ($5,000,000 x 12% x 4/12) Discount amortization ($100,000 x 4/120) Bond interest expense for four months

203,333 3,333 200,000

$ $

200,000 3,333 203,333

2008 Mar 1 Bond Interest Payable Bond Interest Expense Discount on Bonds Payable Cash To record semiannual bond interest payment and interest expense for two months (1/2 of interest for four months, as computed in preceding entry). * (2) Bonds issued at 104: 2007 Dec 31 Bonds Interest Expense Premium on Bonds Payable Bond Interest Payable Accrual of interest on bonds for four months: Contract interest ($5,000,000 x 12% x 4/12) Less: Premium amortization ($200,000 x 4/120) Bond interest expense for four months 2008 Mar 1 Bond Interest Payable Bond Interest Expense Premium on Bonds Payable Cash Semiannual bond interest payment and interest expense for two months (1/2 of interest for four months, as computed in preceding entry).*
* Actual amount differs slightly due to rounding errors.

200,000 101,667 1,667 300,000

193,333 6,667 200,000 $ 200,000 (6,667) 193,333

200,000 96,667 3,333 300,000

b.
Net bond liability at Dec. 31, 2008: Bonds Issued at 98 5,000,000 $ (86,667) Bonds Issued at 104 5,000,000

Bond payable * Less:Discount on bonds payable ($100,000 - $13,333) ** Add:Premium on bonds payable ($200,000-$26,667) Net bond liability

4,913,333

173,333 5,173,333

* Discount amortized at Dec. 31, 2008: Amount amortized in 2007 $ 3,333 Amount amortized in 2008 ($100,000 x 12/120) 10,000 Discount Discount amortized amortized at 12/31/06 at 12/31/08 .. $ 13,333 ** Premium amortized at Dec. 31, 2008: Amount amortized in 2007 . $ 6,667 Amount amortized in 2008 ($200,000 x 12/120) .. 20,000 Premium amortized at 12/31/08 .. $ 26,667 c. The effective rate of interest would be higher under assumption 1. The less that investors pay for bonds with a given contract rate of interest, the higher the effective interest rate they will earn.