Cash... 16,000,000 Notes payable... 16,000,000. Interest expense ($16,000,000 x 12% x 2/12) ,000 Interest payable ,000

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1 Exercise 13-1 Requirement 1 Cash... 16,000,000 Notes payable... 16,000,000 Requirement 2 Interest expense ($16,000,000 x 12% x 2/12) ,000 Interest payable ,000 Requirement 3 Interest expense ($16,000,000 x 12% x 7 /12)... 1,120,000 Interest payable (from adjusting entry) ,000 Notes payable (face amount)... 16,000,000 Cash (total)... 17,440,000 Exercise Jan. 13 No entry is made for a line of credit until a loan actually is made. It would be described in a disclosure note. Feb. 1 Cash... 5,000,000 Notes payable... 5,000,000 May 1 Interest expense ($5,000,000 x 10% x 3 /12) ,000 Notes payable (face amount)... 5,000,000 Cash ($5,000, ,000)... 5,125,000 Dec. 1 Cash (difference)... 9,325,000 Discount on notes payable ($10,000,000 x 9% x 9 /12) ,000 Notes payable (face amount)... 10,000,000

2 Exercise 13-3 (concluded) Dec. 31 The effective interest rate is % ($675,000 $9,325,000) x 12 /9. So, properly, interest should be recorded at that rate times the outstanding balance times one-twelfth of a year: Interest expense ($9,325,000 x % x 1 /12)... 75,000 Discount on notes payable... 75,000 However the same results are achieved if interest is recorded at the discount rate times the maturity amount times one-twelfth of a year: Interest expense ($10,000,000 x 9% x 1 /12)... 75,000 Discount on notes payable... 75, Sept. 1 Interest expense ($10,000,000 x 9% x 8 /12)* ,000 Discount on notes payable ,000 Notes payable (balance)... 10,000,000 Cash (maturity amount)... 10,000,000 * or, ($9,325,000 x % x 8 /12) = $600,000 Exercise 13-6 Requirement 1 Cash... 5,200 Liability gift certificates... 5,200 Cash ($2, ,300) Liability gift certificates... 1,300 Sales revenue... 2,100 Sales taxes payable (4% x $2,100)... 84

3 Requirement 2 Gift certificates sold $5,200 Gift certificates redeemed 1,300 Liability to be reported at December 31 $3,900 Requirement 3 The sales tax liability is a current liability because it is payable in January. The liability for gift certificates is part current and part noncurrent: Gift certificates sold $5,200 x 80% Estimated current liability $4,160 Gift certificates redeemed (1,300) Current liability at December 31 $2,860 Noncurrent liability at December 31 ($5,200 x 20%) 1,040 Total $3,900 Exercise 13-9 Normally, short-term debt (payable within a year) is classified as current liabilities. However, when such debt is to be refinanced on a long-term basis, it may be included with long-term liabilities. The narrative indicates that Sprint has both (1) the intent and (2) the ability ("existing long-term credit facilities") to refinance on a long-term basis. Thus, Sprint reported the debt as long-term liabilities.

4 Exercise Item Reporting Method C_ 1. Commercial paper. N. Not reported D_ 2. Noncommitted line of credit. C. Current liability C_ 3. Customer advances. L. Long-term liability C_ 4. Estimated warranty cost. D. Disclosure note only C_ 5. Accounts payable. A. Asset C_ 6. Long-term bonds that will be callable by the creditor in the upcoming year unless an existing violation is not corrected (there is a reasonable possibility the violation will be corrected within the grace period). C_ 7. Note due March 3, C_ 8. Interest accrued on note, Dec. 31, L_ 9. Short-term bank loan to be paid with proceeds of sale of common stock. D_ 10. A determinable gain that is contingent on a future event that appears extremely likely to occur in three months. C_ 11. Unasserted assessment of back taxes that probably will be asserted, in which case there would probably be a loss in six months. N_ 12. Unasserted assessment of back taxes with a reasonable possibility of being asserted, in which case there would probably be a loss in 13 months. C_ 13. A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months. A_ 14. Bond sinking fund. C_ 15. Long-term bonds callable by the creditor in the upcoming year that are not expected to be called.

5 Exercise The note describes a loss contingency. Dow anticipates a future sacrifice of economic benefits (cost of remediation and restoration) due to an existing circumstance (environmental violations) that depends on an uncertain future event (requirement to pay claim). Dow considers the liability probable and the amount is reasonably estimable. As a result, the company accrued the liability: ($ in millions) Loss provision from environmental claims Liability for settlement of environmental claims