Week 7 Problem Sets
Exercise 9-8A Pg. 513
Exercise 9-10A Pg. 514
Exercise 10-6A Pg. 568
Exercise 10-7A Pg. 568
Exercise 10-8A Pg. 568
Exercise 10-4A Pg. 567
Exercise 10-5A Pg.567
Exercise 10-25A Pg. 572
Exercise 10-19A Pg. 571
Exercise 10-20A Pg. 571
9-8A Current Liabilities
The following transactions apply to Ozark Sales for 2016:
1. The business was started when the company received $50000 from the issue of common stock.
2. Purchased equipment inventory of $380000 on account.
3. Sold equipment for $510000 cash (not including sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise had a cost of $330000.
4. Provided a six-month warranty on the equipment sold. Based on industry estimates the warranty claims would amount to 2 percent of sales.
5. Paid the sales tax to the agency on $400000 of the sales.
6. On September 1 2016 borrowed $50000 from the local bank. The note had a 4 percent interest rate and matured on March 1 2017.
7. Paid $6200 for warranty repairs during the year.
8. Paid operating expenses of $78000 for the year.
9. Paid $250000 of accounts payable.
10. Recorded accrued interest on the note issued in transaction no. 6.
a. Show the effect of these transactions on the financial statements using a horizontal statements model like the one shown here. Use + 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 Income
+ NA +
b. Prepare the journal entries for the above transactions and post them to the appropriate T- accounts.
c. Prepare the income statement balance sheet and statement of cash flows for 2016.
d. What is the total amount of current liabilities at December 312016.
9-10A Calculating Payroll
Old Town Entertainment has two employees in 2016. Clay earns $3600 per month and Philip the manager earns $10800 per month. Neither is paid extra for working overtime. Assume Social Security tax rate is 6 percent on the first $110000 of earnings and the Medicare tax rate earnings tax rate is 1.5 percent on all earnings. The federal income tax withholdings is 15 percent of gross earnings for Clay and 20 percent for Philip. Both clay and Philip have been employed all year.
a. Calculate the net pay for both Clay and Philip for March.
b. Calculate the net pay for both Clay and Philip in December.
c. Is the net pay the same in March and December for both employees? Why or why not?
d. What amounts will hold Old Town report in 2016 W-2s for each employee?
10-6A Two accounting cycles for bonds issued at face value
Doyle Company issued $500000 of 10-year 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 the bond issue in land. The land was leased for an annual $125000 of cash revenue which was collected on December 31 of each year beginning December 31 2016.
a. Prepare the journal entries for these two events and post them to T-Accounts for 2016 and 2017.
b. Prepare the income statement balance sheet and statement of each cash flows for 2016 and 2017.
10-7A Two accounting cycles for bonds issued at face value
On January 1 2016 Bell Corp. issued $180000 of 10-year 6 percent bonds at their face amount. Interest is payable on December31 of each year with the first payment due December 31 2016.
Prepare all the general journal entries related to these bonds for 2016 and 2017.
10-8A Journal entries for callable bonds
Nivan Co. issued $500000 of 5 percent 10-year 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 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 of interest are not required.
10-4A Financial Statement effects of an installment note
A partial amortization schedule for a 10-year note payable issued on January 1 2016 is shown below:
Accounting Principal Cash Applied to Applied to
Period Balanced January 1 Payment Interest Principal
2016 $200000 $27174 $12000 $15174
2017 184826 27174 11090 16084
2018 168742 27174 10125 17049
a. Using a financial statements model like the one shown here record the appropriate amounts for the following 2 events:
(1) January 1 2016 issue of the note payable.
(2) December 31 2016 payment on the note payable.
Event No. Assets = Liab. + Equity Rev Exp. = Net Inc. Cash Flow
b. If the company earned $62200 cash revenue and paid $45000 in cash expenses in addition to the interest in 2016 what is the amount of each of the following?
(1) Net income for 2016.
(2) Cash flow from operating activities for 2016.
(3) Cash flow from financing activities for 2016.
c. What is the amount of interest expense on this loan for 2019?
10-5A Journal Entries for a line of credit
Singer Company has a line of credit with United Bank. Singer can borrow up to $400000 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 at an annual rate equal to 2 percent above the banks prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the 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 $140000 for the month of February.
Month Amount Borrowed Prime Rate for
or (Repaid) the month
January $80000 4.0%
February 60000 4.5
March (20000) 4.0
Provide all journal entries pertaining to Singers line of credit for the first three months of 2016.
10-25A Determining the effects of financial alternatives on ratios
Composite Solutions Company (CSC) has the following account balances:
Current assets $150000 Current Liabilities $100000
Noncurrent assets 350000 Noncurrent Liabilities 250000
Stockholders Equity 150000
The company wishes to raise $80000 in cash and is considering two financial options: CSC can sell $80000 of bonds payable or it can issue additional common stock for $80000. To help the decision process CSCs management wants to determine the effects of each alternative on ots current ratio and debt to assets ratio.
a. Help CSCs management by completing the following chart:
Ratio Currently If Bonds Are Issued If Stock Is Issued
Debt to asset ratio
b. Assume that after the funds are invested EBIT amounts to $6000. Also assume the company pays $6000 in dividends or $6000 in interest depending on which source of financing is used. Based on a 40 percent tax rate determine the amount of the increase in retained earnings that would result under each financing option.
10-19A Effective interest amortization of a bond discount
On January 1 2016 the Diamond Association issued bonds with the face value of $300000 a stated rate of interest of 6 percent and a 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 $278932. Diamond used the effective interest rate method to amortize the bond discount.
a. Determine the amount of the discount on the day of issue.
b. Determine the amount of interest expense recognized on December 31 2016.
c. Determine the carrying value of the bond liability on December 31 2016.
d. Provide the general journal entry necessary to record the December 31 2016 interest expense.
10-20A Effective interest amortization of a bond discount
ON January 1 2016 Parker Company issued bonds with the face value of $80000 a stated rate of interest of 8 percent and a 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 $76888. Parker used the effective interest rate method to amortize the bond discount.
a. Prepare an amortization table as shown below:
Cash Interest Discount Carrying
Payment Expense Amortization Value
January 1 2016 76888
December 31 2016 6400 6920 520 77408
December 31 2017 ? ? ? ?
December 31 2018 ? ? ? ?
December 31 2019 ? ? ? ?
December 31 2020 ? ? ? ?
Totals 32000 35112 3112
b. What item(s) in the table would appear on the 2019 balance sheet?
c. What item(s) in the table would appear on the 2019 income statement?
d. What item(s) in the table would appear on the 2019 statement of cash flows?