Chapter 10

8-A a. Current liabilities:Unearned revenue …………………………………………………… $ 300,000 Notes payable (current portion) …………………………………… 10,000Accrued bond interest payable ………………………………… 36,000Income Taxes payable ……………………………………………. 100,000

Total current liabilities …………………………………………………… $ 446,000

b. Long-term liabilities: $ 70,000

Bonds payable ……………………………………………………… 900,000Notes payable to be refinanced on a long-term basis …………. 75,000Deferred 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.

·

·

Notes payable ($80,000 - $10,000) ………………………………………

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 10.2ASEATTLE CHOCOLATES

a.SEATTLE CHOCOLATES

Partial Balance SheetDecember 31, 2007

Liabilities: Current liabilities:

Income taxes payable $ 40,000 Accrued expenses and payroll taxes 60,000 Mortgage note payable-current portion ( $750,000 - $739,000) 11,000

Accrued interest on mortgage note payable 5,000 Trade accounts payable 250,000 Unearned revenue 15,000

Total current liabilities $ 381,000

Long-term liabilities: Note payable to Northwest Bank $ 500,000 Mortgage note payable ( $750,000 - $11,000 current portion) 739,000 Total long-term liabilities 1,239,000

Total liabilities $ 1,620,000

b. Comments on information in the numbered paragraphs:

As the accrued interest is payable within one month, it is a current liability.

(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)(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 10.3ASWANSON CORPORATION

a.

General Journal

20__ Aug 6 Cash 12,000

Notes Payable 12,000 Borrowed $12,000 @ 12% per annum from Maple

Grove Bank. Issued a 45-day promissory note.

Sept 16 Office Equipment 18,000 Notes Payable 18,000

Issued 3-month, 10% note to Seawald Equipmentas payment for office equipment.

Sept 20 Notes Payable 12,000 Interest Expense 180

Cash 12,180 Paid note and interest to Maple Grove Bank ($12,000 x 12% x 45/360 = $180).

Nov 1 Cash 250,000 Notes Payable 250,000

Obtained 90-day loan from Mike Swanson; interest@ 15% per annum.

Dec 1 Inventory 5,000 Notes Payable 5,000

To record purchase of merchandise and issue 90-day, 14% note payable to Gathman Corporation.

Dec 16 Notes Payable 18,000 Interest Expense 450

Cash 450 Notes Payable 18,000

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

b. Adjusting Entry Dec 31 Interest Expense 6,428

Interest Payable 6,428 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).

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.

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 10.4AQUICK LUBE (concluded)

b.

General Journal

2007 Oct 1 Interest Expense 10,800

Mortgage Note Payable 310 Cash 11,110

To record monthly payment on mortgage.

Nov 1 Interest Expense 10,797

Mortgage Note Payable 313 Cash 11,110 To record monthly mortgage payment.

c.Amortization Table

(12%, 30-Year Mortgage Note Payable for $1,080,000;Payable in 360 Monthly Installments of $11,110)

Reduction inInterest Payment Monthly Interest Unpaid Unpaid Period Date Payment Expense Balance Balance

Issue date Sept. 1, 2007 $ 1,080,000 1 Oct. 1 $ 11,110 $ 10,800 $ 310 1,079,690 2 Nov. 1 11,110 10,797 313 1,079,377 3 Dec. 1 11,110 10,794 316 1,079,061 4 Jan. 1, 2008 11,110 10,791 319 1,078,742

PROBLEM 10.6A PARK RAPIDS LUMBER COMPANY a.

General Journal

(1) Bonds issued at 98:2007

Dec 31 Bond Interest Expense 2,693,334

Discount on Bonds Payable 26,667 Bond Interest Payable 2,666,667

To record accrual of bond interest expense for four months in 2007:

Contract interest ($80,000,000 x 10% x 4/12) $ 2,666,667 Discount amortization ($1,600,000 ÷ 20 years) x 4/12 26,667 Bond interest expense for four months $ 2,693,334

2008 Mar 1 Bond Interest Payable 2,666,667

Bond Interest Expense 1,346,667 Discount on Bonds Payable 13,334 Cash 4,000,000 To record semiannual bond interest payment andinterest expense for two months (1/2 of interest forfour months, as computed in preceding entry). *

(2) Bonds issued at 101: 2007

Dec 31 Bonds Interest Expense 2,653,334 Premium on Bonds Payable 13,333

Bond Interest Payable 2,666,667 Accrual of interest on bonds for four months: Contract interest ($80,000,000 x 10% x 4/12) $ 2,666,667

(13,333) Bond interest expense for four months $ 2,653,334

2008 Mar 1 Bond Interest Payable 2,666,667

Bond Interest Expense 1,326,667 Premium on Bonds Payable 6,666 Cash 4,000,000 Semiannual bond interest payment and interestexpense for two months (1/2 of interest for four

months, as computed in preceding entry).*

* Actual amount differs slightly due to rounding errors.

Less: Premium amortization ($800,000 ÷ 20 yrs) x 4/12

b. Net bond liability at Dec. 31, 2008: Bonds Bonds Issued Issued at 98 at 101 Bond payable $ 80,000,000 $ 80,000,000 * Less: Discount on bonds payable ($1,600,000-$106,667) (1,493,333)

** Add: Premium on bonds payable ($800,000-$53,333) 746,667

Net bond liability at Dec. 31, 2008: $ 78,506,667 $ 80,746,667

* Discount amortized at Dec. 31, 2008: Amount amortized in 2007 ………………………………………………… $ 26,667 Amount amortized in 2008 ($1,600,000 ¸ 20 years) ……………………… 80,000 Discount amortized 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 10.3BSWANLEE CORPORATION

a.

General Journal

20__ Jul 1 Cash 20,000

Notes Payable 20,000 Borrowed $20,000 @ 12% per annum from Weston

Bank. Issued a 90-day promissory note.

Sept 16 Office Equipment 30,000 Notes Payable 30,000

Issued 3-month, 10% note to Moontime Equipmentas payment for office equipment.

Oct 1 Notes Payable 20,000 Interest Expense 600

Cash 20,600 Paid note and interest to Weston Bank ($20,000 x 12% x 90/360 = $600).

Dec 1 Cash 100,000 Notes Payable 100,000

Obtained 120-day loan from Jean Will; interest@ 9% per annum.

Dec 1 Inventory 10,000 Notes Payable 10,000

To record purchase of merchandise and issue90-day, 12% note payable to Listen Corporation.

Dec 16 Notes Payable 30,000 Interest Expense 750

Cash 750 Notes Payable 30,000

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.

b. Adjusting Entry Dec 31 Interest Expense 1,050

Interest Payable 1,050 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

= $200).

c.

Moontime Equipment ($30,000 x 16% x 1/12 x 1/2 =$120).

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.

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 203,333

Discount on Bonds Payable 3,333 Bond Interest Payable 200,000

To record accrual of bond interest expense for four months in 2007:

Contract interest ($5,000,000 x 12% x 4/12) $ 200,000 Discount amortization ($100,000 x 4/120) 3,333 Bond interest expense for four months $ 203,333

2008 Mar 1 Bond Interest Payable 200,000

Bond Interest Expense 101,667 Discount on Bonds Payable 1,667 Cash 300,000 To record semiannual bond interest payment andinterest expense for two months (1/2 of interest forfour months, as computed in preceding entry). *

(2) Bonds issued at 104: 2007

Dec 31 Bonds Interest Expense 193,333 Premium on Bonds Payable 6,667

Bond Interest Payable 200,000 Accrual of interest on bonds for four months: Contract interest ($5,000,000 x 12% x 4/12) $ 200,000 Less: Premium amortization

($200,000 x 4/120) (6,667) Bond interest expense for four months $ 193,333

2008 Mar 1 Bond Interest Payable 200,000

Bond Interest Expense 96,667 Premium on Bonds Payable 3,333 Cash 300,000 Semiannual bond interest payment and interestexpense for two months (1/2 of interest for four

months, as computed in preceding entry).*

* Actual amount differs slightly due to rounding errors.

b. Net bond liability at Dec. 31, 2008: Bonds Bonds Issued Issued at 98 at 104 Bond payable $ 5,000,000 $ 5,000,000 * Less:Discount on bonds payable ($100,000 - $13,333) (86,667)

** Add:Premium on bonds payable ($200,000-$26,667)

Net bond liability 173,333 $ 4,913,333 $ 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 amortized 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.