25 Minutes, Medium
JENCO
a.
Nov 1 Interest Expense 1,000
1,633
Cash 2,633
c.
Reduction in
Monthly Interest Unpaid Unpaid
Payment Expense Balance Balance
100,000$
d.
2015
Note Payable
PROBLEM 10.4B
b.
General Journal
V
icksburg State Bank.
Amortization Table
Date
Issue date Oct. 1, 2015
(12%, 4-Year Mortgage Note Payable for $100,000;
Payable in 48 Monthly Installments of $2,633)
Interest Payment
The amount of the monthly payments exceeds the amount of the monthly interest
expense. Therefore, a portion of each payment reduces the unpaid balance of the loan.
At December 31, 2015, two amounts relating to this mortgage loan will appear as
current liabilities in the borrower’s balance sheet. First, as payments are due on the
first day of each month, one month’s interest has accrued since the December 1
payment. This accrued interest will be paid on January 1, 2016, and therefore, is a
current liability.
Period
Education.
V
15 Minutes, Easy
Sept 1 Cash 5,075,000
Bonds Pa
y
able 5,000,000
Bond Interest Pa
y
able 75,000
b.
Dec 1 75,000
e.
a.
PROBLEM 10.5B
General Journal
E
VENS MANUFACTURING COMPAN
Y
2015
bonds at 100 plus accrued interest for three
and interest expense for 5 months since Dec. 31
months ($5,000,000 x 6% x 3/12 = $75,000).
Bond Interest Payable
($5,000,000 x 6% x 5/12 = $125,000).
To record semiannual bond interest payment
Issued $5,000,000 face value of 6%, 10-yea
r
The market rate of interest on the date of issuance was 6%. Because the bonds were issued
at par (100), the market rate had to have equaled the contract interest rate printed on the
bonds.
Education.
35 Minutes, Strong
RODRIGUEZ PLUMBING COMPAN
Y
Dec 31 Bond Interest Expense 203,333
3,333
Bond Interest Pa
y
able 200,000
200,000$
3,333
203,333$
Mar 1 200,000
101,667
(
6,667
)
193,333$
Mar 1 200,000
2016
months, as computed in preceding entry).*
Bond Interest Payable
* Actual amount differs slightly due to rounding
To record accrual of bond interest expense for
2015
Discount on Bonds Payable
four months in 2015:
Discount amortization ($100,000 x 4/120)
Bond interest expense for four months
Contract interest ($5,000,000 x 12% x 4/12)
($200,000 x 4/120)
Bond interest expense for four months
PROBLEM 10.6B
a.
General Journal
(1) Bonds issued at 98:
2016
Bond Interest Expense
Bond Interest Payable
Education.
b.
Net bond liability at Dec. 31, 2016: Bonds Bonds
Issued Issued
at 98 at 104
5,000,000$ 5,000,000$
*
Less:Discount on bonds payable ($100,000 – $13,333) (86,667)
PROBLEM 10.6B
RODRIGUEZ PLUMBING COMPANY (concluded)
Bond payable
45 Minutes, Strong
a.
Liabilities: (in thousands)
Accounts payabl
e
48,000$
7,200
Accrued interest payabl
e
3,650
Notes payable (short-term) 75,000
Capital lease obligation (current portion) 3,000
I
8
100,000$
150
,
000
$
270
149
,7
30
300
,
000
$
2
,
000
302
,
000
15,000
110
000
T
881
80
$
c. (1) Computation of debt ratio:
Total liabilities
(
above
)
881,580$
Part d appears on the following page.
10% Bonds payable, due April 1, 201
6
8% Bonds payable, due October 1, 2016
Less: Discount on bonds payable
12% Bonds payable, due April 1, 201
8
Part b appears on the following page.
Add: Premium on bonds payable
Capital lease obligation (less current portion)
Current liabilities:
Accrued expenses payable (other than interest)
Long-term liabilities:
PROBLEM 10.7B
NEVADA UTILITY COMPAN
Y
December 31, 2015
Partial Balance Shee
t
NEVADA UTILITY COMPAN
Y
Education.
b. (1)
(2)
(6)
d.
PROBLEM 10.7B
NEVADA UTILITY COMPANY
(concluded)
As the 10% bond issue is being refinanced on a long-term basis (that is, paid from the
proceeds of a long-term bond issue rather than from current assets), it is classified as a
long-term liability rather than a current liability.
The 8% bonds will be repaid from a bond sinking fund rather than from current assets.
Income taxes payable relate to the current year’s income tax return and, therefore, are
a current liability. Although deferred income taxes can include a current portion, all of
the deferred income taxes are stated to be a long-term liability.
Based solely upon its debt ratio and interest coverage ratio, Nevada Utility appears to be a
good credit risk. One must consider, however, that Nevada Utility is a utility company, not a
business organization that battles numerous competitors on a daily basis. Utility companies
Education.
20 Minutes, Strong
a.
Liabilities:
Unearned revenues 268,000$
145,000
Notes payable (current portion) 27,000
A
ccrue
d
b
on
d
i
nterest paya
bl
e
22
,5
00
462,500$
750,000$
b.
●
●
●
The lawsuit pending against the company is a loss contingency. It should be disclosed in
the financial statements, probably in the form of a note to the statements, but no liability
should be formally recognized until a reasonable estimate can be made and the
probability of loss is established.
The 3-year salary commitment to Fred Money, Chief Financial Officer, relates to future
events and, therefore, is not a liability at the present time.
*$150,000 – $27,000 – $123,000
**$260,000 – $145,000 = $115,000
The following items listed by the company have been excluded from current and long-term
liabilities for the reasons indicated:
Interest expense that will arise in the future from existing obligations is not yet a liability.
PROBLEM 10.8B
A
LEXANDER COMPAN
Y
Bonds payable
Current liabilities:
Income taxes payable
Long-term liabilities:
Education.
30 Minutes, Medium
a.
b.
d.
e.
SOLUTIONS TO CRITICAL THINKING CASE
S
LIABILITIES IN PUBLISHED
CASE 10.1
FINANCIAL STATEMENT
S
Wausau Paper’s liability for “current maturities” of long-term debt is common to most large
organizations. This liability arises as debt instruments originally classified as long-term near
their maturity dates. The principal amounts scheduled for repayment within the next year (or
Wells Fargo’s liability for interest-bearing deposits represents the amounts on deposit in
interest-bearing bank accounts. This liability arises from customers depositing money in these
accounts and is discharged whenever customers make withdrawals.
The New York Times’ liability for unexpired subscriptions is a form of unearned revenue
arising from customers paying in advance to receive the newspaper over a designated
payments to holders of winning tickets that have not yet been redeemed. This liability comes
into existence as horses win races, and it is discharged as the track redeems the winning
tickets.
As American Greetings is a manufacturer, it probably sells primarily to wholesalers or
retailers rather than directly to consumers. Apparently, the company allows its customers to
return merchandise that they are unable to sell and to receive a refund of the purchase price.
Given the seasonal nature of holiday greeting cards, wholesalers and retailers are quite likely
experiences. The liability is discharged by making cash refunds (or crediting the account
receivable of a customer making a return).
Education.
g.
h. GM’s liability for postretirement costs is an obligation to pay retirement benefits to
workers—some of whom are already retired and some of whom are currently employed by
Case 10.1
LIABILITIES IN PUBLISHED
Apple’s accrued marketing and distribution liability represents accrued marketing and
FINANCIAL STATEMENTS (concluded
)
Education.
20 Minutes, Strong
BOND PRICES
a.
b.
c.
CASE 10.2
A
BBOTT LAB
S
Differences in the length of time remaining until the bond issues mature is the major factor
influencing the current market prices. As bonds near their maturity dates, their market
The effective rate of interest is higher on issue A bonds. The less that investors pay for
The bonds of both issues pay the investors $60 over twelve months, computed as
follows:
Education.
25 Minutes, Medium
a.
1
2
CASE 10.3
LOSS CONTINGENCIES
The estimated loss from uncollectible accounts is a loss stemming from past events (credit
sales) and is uncertain in dollar amount until the accounts either are paid or become
obviously uncollectible. Therefore, this item is a loss contingency. Typically, the loss
The health, retirement, or even death of company executives are not loss contingencies and
are not recorded or disclosed in financial statements. For one thing, the impact of these
Education.