Exercises: Set B. Exercises: Set B 41

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1 Exercises: Set B 41 Exercises: Set B E10-1B Rebecca Fleming and Carrie Platt borrowed $20,000 on a 7-month, 9% note from Gopher State Bank to open their business, RC s Coffee House. The money was borrowed on June 1, 2014, and the note matures January 1, (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, (d) Prepare the entry required on January 1, 2015, when the loan is paid back. E10-2B On May 15, Redhead Clothiers borrowed some money on a 3-month note to provide cash during the slow season of the year. The interest rate on the note was 4%. At the time the note was due, the amount of interest owed was $900. (a) Determine the amount borrowed by Redhead. (b) Assume the amount borrowed was $50,000. What was the interest rate if the amount of interest owed was $600? (c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a). E10-3B On June 1, Meany Company Ltd. borrows $80,000 from First Bank on a 6-month, $80,000, 6% note. The note matures on December 1. (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)? E10-4B In providing accounting services to small businesses, you encounter the following situations pertaining to cash sales. 1. Mag s Company rings up sales and sales taxes separately on its cash register. On April 10, the register totals are sales $20,000 and sales taxes $1, Hubert Company does not segregate sales and sales taxes. Its register total for April 15 is $14,200, which includes a 5.85% sales tax. Prepare the entries to record the sales transactions and related taxes for (a) Mag s Company and (b) Hubert Company. E10-5B During the month of December, Novel Company s employees earned wages of $70,000. Withholdings related to these wages were $5,355 for Social Security (FICA), $8,000 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 $900 for state unemployment tax. (a) Prepare the necessary December 31 journal entry to record wages expense and wages payable. Assume that wages earned during December will be paid during January. (b) Prepare the entry to record the company s payroll tax expense. E10-6B Season tickets for the Rams are priced at $1,920 and include 16 games. Revenue is recognized after each game is played. When the season began, the amount credited to Unearned Ticket Revenue was $96,000,000. By the end of October, $18,000,000 of the Unearned Ticket Revenue had been recorded as earned. (a) How many season tickets did the Rams sell? (b) How many home games had the Rams 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. (LO 2) (LO 2), AP (LO 2), AP Journalize sales and related texes. Journalize payroll entries. Journalize unearned revenue transactions.

2 42 chapter 10 Reporting and Analyzing Liabilities Journalize unearned subscription revenue. issuance of bonds and payment and accrual of interest. issuance of bonds and payment and accrual of interest. Prepare entries for issuance of bonds, balance sheet presentation and cause of deviations from face value. Prepare entries for issuance of bonds, balance sheet presentation and cause of deviations from face value. Prepare entries for issue of bonds. (LO 5), AN payment of interest, and (LO 5, 6), AP E10-7B Sago Company Ltd. publishes a monthly sports magazine, Home Cooking. Subscriptions to the magazine cost $30 per year. During November 2014, Sago sells 2,800 subscriptions for cash, beginning with the December issue. Sago prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Subscription Revenue and Subscription Revenue. The company has a December 31 year-end. (a) Prepare the entry in November for the receipt of the subscriptions. (b) Prepare the adjusting entry at December 31, 2014, to record subscription revenue earned in December (c) Prepare the adjusting entry at March 31, 2015, to record subscription revenue earned in the first quarter of E10-8B On August 1, 2014, LeDoux Corporation issued $800,000, 6%, 10-year bonds at face value. Interest is payable annually on August 1. LeDoux s year-end is December 31. record the following events. (b) The accrual of interest on December 31, (c) The payment of interest on August 1, E10-9B On January 1, Wurm Company issued $600,000, 6.5%, 10-year bonds at face value. Interest is payable annually on January 1. record the following events. (b) The accrual of interest on December 31. (c) The payment of interest on January 1. E10-10B Benedict Canyon Company issued $800,000, 10-year, 6% bonds at 103. (a) Prepare the journal entry to record the sale of these bonds on January 1, (b) Suppose the remaining Premium on Bonds Payable was 14,400 on December 31, Show the balance sheet presentation on this date. (c) Explain why the bonds sold at a price above the face amount. E10-11B Denton Company issued $700,000, 15-year, 7% bonds at 96. (a) Prepare the journal entry to record the sale of these bonds on January 1, (b) Suppose the remaining Discount on Bonds Payable was 16,800 on December 31, Show the balance sheet presentation on this date. (c) Explain why the bonds sold at a price below the face amount. E10-12B Assume that the following are independent situations recently reported in the Wall Street Journal. 1. General Electric (GE) 6% bonds, maturing January 28, 2015, were issued at Boeing 6% bonds, maturing September 24, 2029, were issued at (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 $500,000 of bonds in total. E10-13B Ohmes Company issued $500,000 of 6%, 20-year bonds on January 1, 2014, at face value. Interest is payable annually on January 1. (b) The accrual of interest on December 31, 2014.

3 Exercises: Set B 43 (d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. E10-14B The situations presented here are independent of each other. For each situation, prepare the appropriate journal entry for the redemption of the bonds. (a) Marlo Corporation retired $200,000 face value, 9% bonds on April 30, 2014, at 101. The carrying value of the bonds at the redemption date was $186,500. The bonds pay annual interest, and the interest payment due on April 30, 2014, has been made and recorded. (b) Willmore, Inc., retired $150,000 face value, 7.5% bonds on June 30, 2014, at 98. The carrying value of the bonds at the redemption date was $174,000. The bonds pay annual interest, and the interest payment due on June 30, 2014, has been made and recorded. E10-15B Melvin, Inc. reports the following liabilities (in thousands) on its January 31, 2014, balance sheet and notes to the financial statements. Accounts payable $5,263.9 Mortgage payable $4,746.7 Accrued pension liability 1,115.2 Operating leases 1,641.7 Unearned rent revenue 1,058.1 Notes payable (due in 2017) Bonds payable 1,961.2 Salaries and wages payable Current portion of Notes payable (due in 2015) 2,563.6 mortgage payable Unused operating line of credit 3,337.6 Income taxes payable Warranty liability current 1,417.3 (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 Melvin s balance sheet as at January 31, E10-16B Suppose McDonald s 2014 financial statements contain the following selected data (in millions). Current assets $ 3,581.9 Interest expense $ Total assets 29,391.7 Income taxes 1,237.1 Current liabilities 4,498.5 Net income 2,395.1 Total liabilities 14,111.9 (a) Compute the following values and provide a brief interpretation of each. (1) Working capital. (3) Debt to assets ratio. (2) Current ratio. (4) Times interest earned. (b) The notes to McDonald s financial statements show that subsequent to 2014 the company will have future minimum lease payments under operating leases of $10,513.8 million. If these assets had been purchased with debt, assets and liabilities would rise by approximately $9,650 million. Recompute the debt to assets ratio after adjusting for this. Discuss your result. E10-17B Suppose 3M Company reported the following financial data for 2014 and 2013 ($ in millions). 3M Company Balance Sheet (partial) Current assets Cash and cash equivalents $1,896 $1,447 Accounts receivable, net 3,362 3,102 Inventories 2,852 2,601 Other current assets 1,728 1,796 Total current assets $9,838 $8,946 Current liabilities $5,362 $7,323 redemption of bonds. (LO 6), AP Prepare liabilities section of balance sheet. (LO 7), AP Calculate liquidity and solvency ratios; discuss impact of unrecorded obligations on liquidity and solvency. (LO 7), AP Calculate current ratio before and after paying accounts payable. (LO 7), AN

4 44 chapter 10 Reporting and Analyzing Liabilities Calculate current ratio before and after paying accounts payable. (LO 7), AN Discuss contingent liabilities. (LO 7), C payment of interest, amortization of premium using straight-line, and (LO 5, 6, 8), AP payment of interest, amortization of discount using straight-line, and (LO 5, 6, 8), AP (a) Calculate the current ratio for 3M for 2014 and (b) Suppose that at the end of M management used $400 million cash to pay off $400 million of accounts payable. How would its current ratio change? E10-18B Unique Boutique reported the following financial data for 2014 and UNIQUE BOUTIQUE Balance Sheet (partial) September 30 (in thousands) Current assets Cash and short-term deposits $2,574 $1,021 Accounts receivable 2,347 1,575 Inventories 1,201 1,010 Other current assets Total current assets $6,444 $3,798 Current liabilities $5,103 $3,608 (a) Calculate the current ratio for Unique Boutique for 2014 and (b) Suppose that at the end of 2014, the Unique 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, the Unique Boutique has an undrawn operating line of credit of $12.5 million. Would this affect any assessment that you might make of the Unique Boutique s short-term liquidity? Explain. E10-19B 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: The Company and its subsidiaries are invloved 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. (a) Explain why the company does not have to record these contingent liabilities. (b) Comment on any implications for analysis of the financial statements. *E10-20B Kirk Company issued $700,000, 4.5%, 30-year bonds on January 1, 2014, at 103. Interest is payable annually on January 1. Kirk uses straight-line amortization for bond premium or discount. (b) The accrual of interest and the premium amortization on December 31, (d) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded. *E10-21B Magna Company issued $400,000, 6%, 15-year bonds on December 31, 2014, for $388,000. Interest is payable annually on December 31. Magna uses the straight-line method to amortize bond premium or discount. (b) The payment of interest and the discount amortization on December 31, (c) The redemption of the bonds at maturity, assuming interest for the last interest period has been paid and recorded.

5 Exercises: Set B 45 *E10-22B Apex Corporation issued $500,000, 7%, 20-year bonds on January 1, 2014, for $450,909. This price resulted in an effective-interest rate of 8% on the bonds. Interest is payable annually on January 1. Apex uses the effective-interest method to amortize bond premium or discount. Prepare the journal entries to record (round to the nearest dollar): (b) The accrual of interest and the discount amortization on December 31, *E10-23B PAYmore Company issued $380,000, 7%, 10-year bonds on January 1, 2014, for $407,968. This price resulted in an effective-interest rate of 6% on the bonds. Interest is payable annually on January 1. PAYmore uses the effective-interest method to amortize bond premium or discount. Prepare the journal entries (rounded to the nearest dollar) to record: (b) The accrual of interest and the premium amortization on December 31, *E10-24B Kymoana Co. receives $350,000 when it issues a $350,000, 6%, mortgage note payable to finance the construction of a building at December 31, The terms provide for semiannual installment payments of $17,856 on June 30 and December 31. Prepare the journal entries to record the mortgage loan and the first two installment payments. *E10-25B Varian Corporation issued a $500,000, 10%, 10-year installment note payable on January 1, Payments of $81,370 are made each January 1, beginning January 1, (a) What amounts should be reported under current liabilities related to the note on December 31, 2014? (b) What should be reported under long-term liabilities? issuance of bonds, payment of interest, and amortization of discount using effectiveinterest method. (LO 5, 9), AP issuance of bonds, payment of interest, and amortization of premium using effectiveinterest method. (LO 5, 9), AP record mortgage note and installment payments. (LO 10), AP Balance sheet presentation of installment note payable. (LO 10), AP

Chapter 10 - REPORTING AND ANALYZING LIABILITIES

Revised Summer 2018 Chapter 10 Review 1 Chapter 10 - REPORTING AND ANALYZING LIABILITIES LO 1: Explain how to account for current liabilities. Current Liability: a debt that a company expects to pay 1.