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Acctg 115 - CH 10 Solutions
Acctg 115 - CH 10 Solutions
b.
Long-term liabilities: $ 70,000 Notes payable ($80,000 - $10,000) Bonds payable 900,000 Notes payable to be refinanced on a long-term basis . 75,000 Deferred Income Taxes . 85,000 Total long-term liabilities .. $ 1,130,000 The interest expense that will arise from existing obligations is not yet a liability. The lawsuit pending against the company is a loss contingency. It should be disclosed, but no liability is recorded as no reasonable estimate can be made of the dollar amount. The 3-year salary commitment relates to future transactions and, therefore, is not yet a liability of the company.
Long-term liabilities: Note payable to Northwest Bank Mortgage note payable ( $750,000 - $11,000 current portion) Total long-term liabilities Total liabilities
b. Comments on information in the numbered paragraphs: (1) Although the note payable to Northwest Bank is due in 60 days, it is classified as a long-term liability because it is to be refinanced on a long-term basis. (2) The $11,000 principal amount of the mortgage note payable scheduled for repayment in 2006 ($750,000 - $739,000) is classified as a current liability. Principal to be repaid after December 31, 2008, is classified as a long-term liability. (3) As the accrued interest is payable within one month, it is a current liability. (4) The pending lawsuit is a loss contingency. As no reasonable estimate can be made of the loss incurred (if any), this loss contingency does not meet the criteria for accrual. It will be disclosed in the notes accompanying the financial statements, but it should not be shown as a liability.
12,000 12,000
18,000 18,000
Sept
Nov
250,000 250,000
5,000 5,000
Dec
b.
Dec
6,428 6,428
c.
The Seawald Equipment note dated September 16 was due in full on December 16. The higher rate of interest on the new note may be associated with the increased risk of collecting in 30 days the $18,000 principal plus accrued interest due.
c.
Amortization Table (12%, 30-Year Mortgage Note Payable for $1,080,000; Payable in 360 Monthly Installments of $11,110) Reduction in Payment Monthly Interest Unpaid Date Payment Expense Balance Sept. 1, 2007 Oct. 1 $ 11,110 $ 10,800 $ 310 Nov. 1 11,110 10,797 313 Dec. 1 11,110 10,794 316 Jan. 1, 2008 11,110 10,791 319
$ $
2008 Mar 1 Bond Interest Payable Bond Interest Expense Discount on Bonds Payable Cash To record semiannual bond interest payment and interest expense for two months (1/2 of interest for four months, as computed in preceding entry). * (2) Bonds issued at 101:
2007 Dec 31 Bonds Interest Expense Premium on Bonds Payable Bond Interest Payable Accrual of interest on bonds for four months: Contract interest ($80,000,000 x 10% x 4/12) Less: Premium amortization ($800,000 20 yrs) x 4/12 Bond interest expense for four months 2008 Mar 1 Bond Interest Payable Bond Interest Expense Premium on Bonds Payable Cash Semiannual bond interest payment and interest expense for two months (1/2 of interest for four months, as computed in preceding entry).* * Actual amount differs slightly due to rounding errors.
b.
Net bond liability at Dec. 31, 2008: Bonds Issued at 98 80,000,000 $ (1,493,333) 78,506,667 $ Bonds Issued at 101 80,000,000 746,667 80,746,667
Bond payable * Less: Discount on bonds payable ($1,600,000-$106,667) ** Add: Premium on bonds payable ($800,000-$53,333) Net bond liability at Dec. 31, 2008:
* Discount amortized at Dec. 31, 2008: Amount amortized in 2007 $ 26,667 Amount amortized in 2008 ($1,600,000 20 years) .. 80,000 Discount Discount amortized amortized at 12/31/06 at 12/31/08 . $ 106,667 ** Premium amortized at Dec. 31, 2008: Amount amortized in 2007 . $ 13,333 Amount amortized in 2008 ($800,000 20 years) 40,000 Premium amortized at 12/31/08 .. $ 53,333 c. The effective rate of interest would be higher under assumption 1. The less that investors pay for bonds with a given contract rate of interest, the higher the effective interest rate they will earn.
20,000 20,000
30,000 30,000
Oct
Dec
100,000 100,000
10,000 10,000
Dec
b. Dec
1,050 1,050
c.
The Moontime Equipment note dated September 16 was due in full on December 16. The higher rate of interest on the new note may be associated with the increased risk of collecting in 60 days the $30,000 principal plus accrued interest due.
$ $
2008 Mar 1 Bond Interest Payable Bond Interest Expense Discount on Bonds Payable Cash To record semiannual bond interest payment and interest expense for two months (1/2 of interest for four months, as computed in preceding entry). * (2) Bonds issued at 104: 2007 Dec 31 Bonds Interest Expense Premium on Bonds Payable Bond Interest Payable Accrual of interest on bonds for four months: Contract interest ($5,000,000 x 12% x 4/12) Less: Premium amortization ($200,000 x 4/120) Bond interest expense for four months 2008 Mar 1 Bond Interest Payable Bond Interest Expense Premium on Bonds Payable Cash Semiannual bond interest payment and interest expense for two months (1/2 of interest for four months, as computed in preceding entry).*
* Actual amount differs slightly due to rounding errors.
b.
Net bond liability at Dec. 31, 2008: Bonds Issued at 98 5,000,000 $ (86,667) Bonds Issued at 104 5,000,000
Bond payable * Less:Discount on bonds payable ($100,000 - $13,333) ** Add:Premium on bonds payable ($200,000-$26,667) Net bond liability
4,913,333
173,333 5,173,333
* Discount amortized at Dec. 31, 2008: Amount amortized in 2007 $ 3,333 Amount amortized in 2008 ($100,000 x 12/120) 10,000 Discount Discount amortized amortized at 12/31/06 at 12/31/08 .. $ 13,333 ** Premium amortized at Dec. 31, 2008: Amount amortized in 2007 . $ 6,667 Amount amortized in 2008 ($200,000 x 12/120) .. 20,000 Premium amortized at 12/31/08 .. $ 26,667 c. The effective rate of interest would be higher under assumption 1. The less that investors pay for bonds with a given contract rate of interest, the higher the effective interest rate they will earn.