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Exercise 9-8A Current Liabilities
The following transactions apply to Ozark Sales 2016
- The business was started when the company received 50,000 from the issue of common stock.
- Purchased equipment inventory 0f 380,000 on account.
- Sold equipment for 510,000 cash (not including sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise had a cost of 330,000.
- Provided a six- month warranty on the equipment sold. Based on industry estimates, the warranty claims would amount to 2 percent of sales.
- Paid the sales tax to the state agency on 400,00 of the sales.
- On September 1, 2016, borrowed 50,000 from the local bank. The note had a 4 percent interest rate on matured on March 1, 2017.
- Paid 6,200 for warranty repairs during the year.
- Paid operating expanses of 78,000 for the year.
- Paid 250,000 of accounts payable.
- Recorded accrued interest on the note issued in transaction no. 6.
- Show the effect of these transactions on the financial statement using horizontal statements model like the one sown here. Use the + for increase, – for decrease, and NA for not affected. In the cash flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). The first transaction is recorded as an example.
|Assets = Liabilities + Equity||Rev. – Exp. = Net Inc.||Cash Flow|
|+ NA +||NA NA NA||+ FA|
- Prepare the journal entries for the above transactions and post them to the appropriate T- accounts.
- Prepare the income statement, balance sheet, and statement of cash flow for 2016.
- What is the total amount of current liabilities at December 31, 2016?
Exercise 9-10A Calculating Payroll
Old Town Entertainment has two employees in 2016. Clay earns 3,600 per month and Philip. the manager earns 10,800 per month. Neither is paid extra for working overtime. Assume the Social Security tax is 6 percent on the first 110,000 of earnings and the Medicare tax rate is 1.5 percent on all earnings. The federal income tax withholding is 1.5 percent of gross earnings for Clay and 20 percent for Philip. Both Clay and Philip have been employed all year.
- Calculate the net pay for both Clay and Philip for March.
- Calculate the net pay for both Clay and Philip for December.
- Is the net pay the same in March and December for both employees? Why or Why not?
- What amounts will Old Town Entertainment report on the 2016 W-2 for each employee?
Exercise 10-6A Two accounting cycles for bonds at face value
Doyle Company issued 500,000 of 20 years, 7 percent bonds on January 1,2016. The bonds were issued at face value. Interest is payable in cash on December 31 of each year. Doyle immediately invested the proceeds from issued in land. The land was leased for annual 125,000 of revenue, which was collected on December 31 of each year, beginning December 31 2016.
- Prepare the journal entries for these events, and post them to T- account for 2016 and 2017.
- Prepare the income statement, balance sheet, and statement of cash flow for 2016 and 2017.
Exercise 10-7A Two accounting cycles for bonds at face value
On January 1, 2016. Bell Corp issued 180,000 of 10year, 6 percent bonds at their face amount. Interest is payable on December 31 of each year with the first payment due December 31,2016.
Prepare all the general journal entries related to these bond for 2016 and 2017.
Exercise 10-8A Journal entries for callable bonds
Nivan Co. issued 500,000 of 5 percent, 10 years, callable bonds on January 1,2016, at their face value. The call premium was 3 percent (bonds are callable at 103). Interest was payable annually on December 31, The bonds were called on December 31, 2020.
Prepare the journal entries to record the bond issue on January 1, 2016, and the bond redemption on December 31, 2020. Entries for accrual and payment interest are not required.
Exercise 10-4A Financial statement effects of an installment note
A partial amortization schedule for 10 year note payable issued on January 1. 2016, is shown below:
Balance January 1
|Applied to Interest
|Applied to Principal
- Using a financial statement model like the one shown here record the appropriate amounts for the following two events.
- January 1, 2016, issued of the note payable.
- December 31, 2016, payment on the payable.
|Assets = Liab. + Equity||Rev. – Exp. = Net Inc.||Cash Flow|
- If the company earned 62,000 cash revenue and paid 45,000 in cash expenses in addition to the interest in 2016, what is the amount od each of the following?
- Net income from operating activities for 2016
- Cash flow operating activities for 2016
- Cash flow from financing activities for 2016
- What is the amount of interest expense on this loan for 2019?
Exercise 10-5A Journal entries for a line of credit
Singer Company has a line of credit with United Bank. Singer can borrow up to 400,000 at any time over the course of the 2016 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during the first three months of 2016. Singer agreed to pay interest of an annual rate equal to 2percent above the bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable to cash on the first day of each month. The interest rate is applied to the outstanding monthly balance. For example, Singer pays 6.5 percent (4.5 percent + 2 percent) annual interest on 140,000 for the month of February.
|Amount Borrowed or (Repaid)
|Prime Rate for the Month
Provide all journal entries pertaining to Singer’s line of credit for the first three months of 2016
Excercise10-19A Effective Interest amortization of a bond discount
On January 1 2016, The Diamond Association issued bonds with face value of 300,000, a stated rate of interest of 6 percent, and 10-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 7 percent at the time the bonds were issued. The bonds sold for 278,932. Diamond used the effective interest rate method to amortize the bond discount.
- Determine the amount of the discount of the day of issue.
- Determine the amount of inters expense recognized on December 31, 2016
- Determine the carrying value of the bond liability on December 31, 2016
- Provide the general journal entry necessary the December 31, 2016, interest expense.
Exercise 10-20A Effective interest amortization of a bond
On January 1, 2016, Parker Company issued bonds with face value of 80,000, a stated rate of interest of 8 percent, and five-year term to maturity. Interest is payable in cash on December 31 of each year. The effective rate of interest was 9 percent at the time the bonds were issued. The bonds sold for 76,888. Parker used the effective interest rate method to amortize the bond discount.
- Prepare an amortization table as shown below:
January 1. 2016
December 31, 2016
December 31, 2017
December 31, 2018
December 31. 2019
December 31, 2020
- What item(s) in the table would appear on the 2019 balance sheet?
- What item(s) in the table would appear on the 2019 income statement?
- What item(s) in the table would appear on the 2019 cash flows?
Exercise 10-25A Determining the effects of financing alternatives on ratios
Composite Solutions Company (CSC) has the following account balances:
The company wishes to raise 80,000 n cash and is considering two financing options: CSC can sell 80,000 of bonds payable, or its issue additional common stock for 80,000. To help in the decision process, CSC’s management wants to determine the effects of each alternative on its current ratio and debt to assets ratio.
- Help CSC’S management by completing the following chart:
Debt to asset ratio
|Currently||If Bonds Are Issued||If Stock Is Issued|
- Assume that after the funds are invested. EBIT amounts to 60,000. Also assume the company pays 6,000 in interest depending on which source of financing is used. Based o a 40 percent tax rate. Determine the amount of the increase in retained earnings that would result under each financing option.