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23 Nov 2019

Long-term Liabilities

LTL-3) On January 1st of 2012, P& P Products purchased $1,000,000 of the five-year, 8% bonds ofDelta Products in the open market for $960,000. Delta Products is awholly-owned subsidiary of P & P Products. The bonds are datedand were issued by Delta Products on January 1st 2010.The bonds pay interest every January 1st and July1st. The effective interest method is used foramortization purposes. The market rate is 10%.

Required: Make any necessary entries on DeltaProducts books.

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1. On January 1, 2015 James Bond & Company issued 5-yearbonds with a face value of $500,000. The bonds carry a statedinterest rate of 7%. The straight-line method is used to amortizepremiums & discounts.

a. Prepare the journal entry for the issuance assuming the bondsare issued at 97.

i. Was the market interest rate higher or lower than the statedinterest at issue?

ii. Prepare the adjusting journal entry at December 31, 2015 ifinterest is payable on December 31.

iii. Prepare the adjusting journal entry at December 31, 2015 ifinterest is payable on January 1, 2016

b. Prepare the journal entry for the issuance assuming the bondsare issued at 102.

i. Was the market interest rate higher or lower than the statedinterest at issue?

ii. Prepare the adjusting journal entry at December 31, 2015 ifinterest is payable on December 31.

iii. Prepare the adjusting journal entry at December 31, 2015 ifinterest is payable on January 1, 2016.

iv. Prepare the journal entry at maturity assuming that interesthas been accrued and paid.

2. Record journal entries for the following transactionsconcerning current & long-term liabilities at Lubar Corp..

a. On January 1, 2015 the corporation acquired a building bysigning an $800,000, 10%, 5-year mortgage note payable. The termsprovide for yearly installment payments of $211,038 on December31.

b. On January 1, 2015 the corporation issued a $400,000, 11%,10-year bond at 110 with interest payable on December 31. Thestraight-line method is used to amortize the bond premium.

c. On December 31, the corporation issued a $300,000, 9%, 5-yearbond at 97 with interest payable on December 31 (starting in 2016).The straight-line method is used to amortize the bond discount.

d. Record the necessary adjusting journal entries at December31, 2015 for items “a” and “b”.

e. Prepare the liabilities section of the balance sheet as of asof December 31, 2015 for items “a” and “b”.

3. Prepare the following independent journal entries.

a. On September 1, 2015 Rushmore Corporation issued a 6-month,12% note in the amount of $20,000. Interest & principal will bepaid when the note matures on February 28, 2016.

i. Journalize the issuance of the note on September 1, 2015.

ii. Journalize the adjusting entry needed at December 31,2015.

iii. Journalize the maturity of the note on February 28,2016.

b. Sold merchandise for cash totaling $422,400, which includes5.6% sales tax on October 6th. Sales tax is remitted tothe state department of revenue every January 1st.

i. Journalize the October 6th sale.

ii. What is the gross profit on this sale if the cost of themerchandise sold was $270,000?

c. During December, the company’s employees earned wages of$160,000. Withholdings related to these wages were $12,240 forSocial Security (FICA), $13,300 for Federal income tax, and $4,000for state income tax. The company owed no money related to theseearnings for federal or state unemployment tax. Assume the wagesearned during December will be paid in January. No entry has beenmade for wage or payroll tax expense as of December 31.

i. Prepare journal entries to record wage expense & payrollexpense at December 31.

Question 8. 8. (TCO D) Which of the following is not acceptabletreatment for the presentation of current liabilities? (Points :5)

Listing current liabilities in order of maturity

Listing current liabilities according to amount

Offsetting current liabilities against assets that are to beapplied to their liquidation

Showing current liabilities immediately below current assets toobtain a presentation of working capital

Question 9. 9. (TCO D) Jenkins Corporation has $2,500,000 ofshort-term debt it expects to retire with proceeds from the sale of75,000 shares of common stock. If the stock is sold for $20 pershare subsequent to the balance sheet date, but before the balancesheet is issued, what amount of short-term debt could be excludedfrom current liabilities? (Points : 5)$1,500,000. $2,500,000. $1,000,000. $0

Question 10. 10. (TCO D) Tender Foot, Inc. is involved inlitigation regarding a faulty product sold in a prior year. Thecompany has consulted with its attorney and determined that it ispossible that it may lose the case. The attorneys estimated thatthere is a 40% chance of losing. Tender Foot’s attorney estimatedthat if it loses, then the amount of any payment would be $500,000.What is the required journal entry as a result of this litigation?(Points : 5)

Debit Litigation Expense for $500,000 and credit LitigationLiability for $500,000.

No journal entry is required.

Debit Litigation Expense for $200,000 and credit LitigationLiability for $200,000.

Debit Litigation Expense for $300,000 and credit LitigationLiability for $300,000

Question 11. 11. (TCO D) Reich, Inc. issued bonds with amaturity amount of $200,000 and a maturity 10 years from date ofissue. If the bonds were issued at a premium, this indicates that(Points : 5)

the effective yield or market rate of interest exceeded thestated (nominal) rate.

the nominal rate of interest exceeded the market rate.

the market and nominal rates coincided.

no necessary relationship exists between the two rates.

Question 12. 12. (TCO D) The printing costs and legal feesassociated with the issuance of bonds should (Points : 5)

be expensed when incurred.

be reported as a deduction from the face amount of bondspayable.

be accumulated in a deferred charge account and amortized overthe life of the bonds.

not be reported as an expense until the period the bonds matureor are retired.

Question 13. 13. (TCO D) Feller Company issues $20,000,000 of10-year, 9% bonds on March 1, 2010 at 97 plus accrued interest. Thebonds are dated January 1, 2010, and pay interest on June 30 andDecember 31. What is the total cash received on the issue date?(Points : 5) $19,400,000$20,450,000 $19,700,000 $19,100,000

Question 14. 14. (TCO D) A company issues $5,000,000, 7.8%,20-year bonds to yield 8% on January 1, 2010. Interest is paid onJune 30 and December 31. The proceeds from the bonds are$4,901,036. Using effective-interest amortization, how muchinterest expense will be recognized in 2010? (Points :5) $195,000 $390,000 $392,124 $392,083

Question 15. 15. (TCO D) Clothes Horse Corp. ("CHC") issued$500,000 bonds due in 10 years on January 1, Year 1 at a premiumfor $567,105. Bond issue costs of $25,000 are being amortized overthe 10 year life of the bonds under U.S. GAAP. On January 1, Year6, when the carrying value of the bond was $539,940, CHC redeemedthe bonds at 102. What amount of gain should CHC record related tothe redemption? (Points : 5) $10,000 $17,440 $39,940 $52,440

On January 1, Year 1, DPH, Co. issued a $3,500,000, 5 year bond.Interest will be paid on June 30 and December 31 each year. Thebond has a stated rate of 5% and was issued at 98. Ignore theeffects of taxes for this problem.

31.

(6 points) Make the journal entry for the issuance of thebond.

32.

(16 points) Make the journal entries for the first two interestpayments, assuming that DPH uses the effective interestmethod for amortizing any premiums or discounts on theirdebt. The effect interest rate on the bonds was 5.5%

33.

(15 points) On July 1, Year 4, DPH decided to retire 10% of thebonds in order to avoid violating a debt covenant on their majorline of credit. On that day, the bonds were selling at 101. Makethe journal entry to record the early retirement, assumingthat DPH, Co. uses the straight-line method for amortizingany premiums or discounts on their debt.

34.

(22 points) On August 31st, Year 4, the bonds were selling at97. Because of the good price, DPH decided to retire an additional30% of the bond. Make any necessary journal entries to record therepurchase. Assume that the market price includes anyaccrued interest and that DPH is still using the straight-linemethod.

35.

(16 points) Before recording the bond retirements, DPH reportedthe following information:

Net Sales

$ 8,000,000

Net Income

$ 1,200,000

Current Assets

$ 1,800,000

Total Assets

$ 9,000,000

Current Liabilities

$ 1,350,000

Total Liabilities

$ 6,300,000

Calculate the company's ROA, Debt-to-Equity, and Current Ratiosbefore and after the debt retirement. Assume all other necessaryentries, including any interest on the bonds, have been properlyrecorded. (HINT: Since you don't have beginning values, just usethe ending values for those ratios requiring averages!)

Use the following to answer questions 36-41:

At the end of last year, Tull Co. submitted paperwork to switchfrom a sole proprietor ship to a corporation. Just prior to yearend, the company received final authorization from the state ofIdaho to incorporate. In the articles of incorporation, Tull, Inc.is authorized to issues 1,000,000 shares of $2 par common stock. OnDecember 31st, Mrs. Tull received 250,000 shares of common stock inexchange for her equity in the sole proprietorship.

36.

(3 points) Make the journal entry to record Tull's first equityoffering on January 15th of the current year. The company issued150,000 shares at par value.

37.

(5 points) Make the journal entry to record an additional equityoffering on June 1st. The company issued 60,000 shares for $8 pershare.

38.

(3 points) On August 15th, Tull decided to repurchase 15,000shares of common stock in order to improve stock price. Make theappropriate journal entry to record the repurchase if the marketprice for Tull common stock on that day was $6 per share.

39.

(6 points) On November 11th, Tull's management decided that thestock price had increased sufficiently for them to reissue 7,500shares of their treasury stock. Make the entry to record thereissue of these shares if the stock price was $17 per share.

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