Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–61
EXERCISES
Ex. 261
Brewer Company has the following selected accounts after posting adjusting entries:
Accounts Payable $ 55,000
Notes Payable, 3-month 90,000
Accumulated Depreciation—Equipment 14,000
Notes Payable, 5-year, 8% 75,000
Payroll Taxes Expense 6,000
Interest Payable 5,000
Mortgage Payable 180,000
Sales Taxes Payable 23,000
Instructions
(a) Prepare the current liability section of Brewer Company’s balance sheet, assuming $12,000
of the mortgage is payable next year.
(b) Comment on Brewer’s liquidity, assuming total current assets are $450,000.
Ex. 262
On March 1, Cooper Company borrows $80,000 from New National Bank by signing a 6-month,
6%, interest-bearing note.
Instructions
Prepare the necessary entries below associated with the note payable on the books of Cooper
Company.
(a) Prepare the entry on March 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the semiannual
financial statements. Assume no other interest accrual entries have been made.
(c) Prepare the entry to record payment of the note at maturity.
FOR INSTRUCTOR USE ONLY
Ex. 263
On June 1, Huntley Company borrows $50,000 from the bank by signing a 60-day, 6%, interest-
bearing note.
Instructions
Prepare the necessary entries below associated with the note payable on the books of Huntley
Company.
(a) Prepare the entry on June 1 when the note was issued.
(b) Prepare any adjusting entries necessary on June 30 in order to prepare the monthly
financial statements. Assume no other interest accrual entries have been made.
(c) Prepare the entry to record payment of the note at maturity.
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–63
Ex. 264
On May 15, Holt’s 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 $1,200.
Instructions
(a) Determine the amount borrowed by Holt’s.
(b) Assume the amount borrowed was $54,000. What was the interest rate if the amount of
interest owed was $900?
(c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a).
Ex. 265
In providing accounting services to small business, you encounter the following situations
pertaining to cash sales.
(1) Kushner Company rings up sales and sales taxes separately on its cash register. On April
10 the register totals are sales $40,000 and sales taxes $2,800.
(2) Grant Company does not segregate sales and sales taxes. Its register total for April 15 is
$22,260, which includes a 6% sales tax.
Instructions
Prepare the entries to record the sales transactions and related taxes for (a) Kushner Company
and (b) Grant Company.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
10–64
Ex. 266
During the month of March, Preston Company’s employees earned wages of $90,000.
Withholdings related to these wages were $6,885 for Social Security (FICA), $14,200 for federal
income tax, $6,200 for state income tax, and $600 for union dues. The company incurred no cost
related to these earnings for federal unemployment tax, but incurred $1,300 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.
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–65
Ex. 267
Presented below are two independent situations:
(a) Morten Corporation purchased $480,000 of its bonds on June 30, 2017, at 102 and
immediately retired them. The carrying value of the bonds on the retirement date was
$431,100. The bonds pay annual interest and the interest payment due on June 30, 2017,
has been made and recorded.
(b) McEvoy, Inc., purchased $330,000 of its bonds at 96 on June 30, 2017, and immediately
retired them. The carrying value of the bonds on the retirement date was $321,000. The
bonds pay annual interest and the interest payment due on June 30, 2017, has been made
and recorded.
Instructions
For each of the independent situations, prepare the journal entry to record the retirement or
conversion of the bonds.
Ex. 268
The adjusted trial balance for Helton Corporation at the end of 2017 contained the following
accounts:
Bonds payable, 10% ………………………………………………….. $500,000
Interest payable ………………………………………………………… 20,000
Discount on bonds payable ………………………………………… 30,000
Notes payable, 9%, due 2019 ……………………………………… 70,000
Accounts payable ……………………………………………………… 120,000
Instructions
(a) Prepare the long-term liabilities section of the balance sheet.
(b) Indicate the proper balance sheet classification for the accounts listed above that do not
belong in the long-term liabilities section.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
10–66
Ex. 269
Hensley, Inc. reports the following liabilities (in thousands) on its January 31, 2017, balance sheet
and notes to the financial statements.
Accounts payable $3,463.9
Accrued pension liability 1,215.2
Property taxes payable 1,158.1
Bonds payable 1,961.2
Current portion of long-term debt 1,992.2
Income taxes payable 235.2
Notes payable—long-term 9,246.7
Operating leases 1,641.7
Mortgage payable 435.6
Federal income taxes payable 558.1
Salaries and wages payable 2,563.6
Unused operating line of credit 3,337.6
Warranty liability— current 1,617.3
Instructions
Prepare the liabilities section of Hensley’s balance sheet as at January 31, 2017.
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–67
Solution 269 (Cont.)
Ex. 270
McDonald’s financial statements contain the following selected data (in millions).
Current assets $ 3,881.9
Total assets 29,391.7
Current liabilities 4,498.5
Total liabilities 13,611.9
Interest expense $ 410.1
Income taxes 1,237.1
Net income 2,395.1
Instructions
(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 this year 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 $9,400 million. Recompute the debt to assets ratio after adjusting for this.
Discuss your result.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
10–68
*Ex. 271
Renfro Company issued $300,000 of 8%, 10-year bonds at 102. Interest is paid annually, and the
straight-line method is used for amortization. Assume that the market rate for similar investments
is 7%. The bonds are issued on the date of the bonds.
a. What amount was received for the bonds?
b. How much interest is paid each interest period?
c. What is the premium amortization for the first interest period?
d. How much interest expense is recorded on the first interest date?
e. What is the carrying value of the bonds after the first interest date?
*Ex. 272
On January 1, 2017, Powell Corporation issued $600,000, 5%, 5-year bonds dated January 1,
2017, at 95. The bonds pay annual interest on January 1. The company uses the straight-line
method of amortization and has a calendar year end.
Instructions
Prepare all the journal entries that Powell Corporation would make related to this bond issue
through January 1, 2018. Be sure to indicate the date on which the entries would be made.
Reporting and Analyzing Liabilities
FOR INSTRUCTOR USE ONLY
10–69
*Ex. 273
Grand Company issued $800,000, 10%, 20-year bonds on January 1, 2017, at 104. Interest is
payable annually on January 1. Grand uses the straight-line method of amortization and has a
calendar year end.
Instructions
Prepare all journal entries made in 2017 related to the bond issue.
*Ex. 274
Garrison Company issued $2,000,000, 7%, 20-year bonds on January 1, 2017, at 105. Interest is
payable annually on January 1. Garrison 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, 2017.
(c) The payment of interest on January 1, 2018.
(d) The redemption of the bonds at maturity, assuming interest for the last interest period has
been paid and recorded.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
10–70
*Ex. 275
Shannon Company issued $1,000,000, 8%, 10-year bonds on December 31, 2016, for $960,000.
Interest is payable annually on December 31. Shannon 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, 2017.
(c) The redemption of the bonds at maturity, assuming interest for the last interest period has
been paid and recorded.
*Ex. 276
Wynne Company issued $900,000 of 10%, 5-year bonds at 108. Interest is paid annually, and the
effective interest method is used for amortization. Assume that the market rate for similar
investments is 8%. The bonds are issued on the date of the bonds.
a. What amount was received for the bonds?
b. How much interest is paid each interest period?
c. What is the premium amortization for the first interest period?
d. How much interest expense is recorded on the first interest date?
e. What is the carrying value of the bonds after the first interest date?
Reporting and Analyzing Liabilities
10–71
*Ex. 277
Moon Company issued $500,000, 10%, 5-year bonds on January 1, 2017, at 106. Interest is
payable annually on January 1. Moon uses the effective-interest method of amortization and has
a calendar year end and the bonds were issued for an effective interest rate of 8%.
Instructions
Prepare all journal entries made in 2017 related to the bond issue.
*Ex. 278
Perez Co. receives $2,200,000 when it issues a $2,200,000, 8%, mortgage note payable to
finance the construction of a building at December 31, 2016. The terms provide for annual
installment payments of $257,000 on December 31.
Instructions
Prepare the journal entries to record the mortgage loan and the first two installment payments.