Problems & Solutions Chapter 11

Liabilities

1. Cardinal Company has the following obligations at December 31: (a) a note payable for
$100,000 due in 2 years, (b) a 10 year mortgage payable of $ 300,000 payable in ten $
30,000 annual payments, (c) interest payable of $ 15,000 on the mortgage, and (d)
account payable of $ 60,000. For each obligation, indicate whether it should be classified
as a current liability. (Assume an operating cycle of less than one year)

(a) A note payable due in two years is a long-term liability, not a current liability.
(b) $30,000 of the mortgage payable is a current maturity of long-term debt. This
amount should be reported as a current liability.
(c) Interest payable is a current liability because it will be paid out of current assets
in the near future.
(d) Accounts payable is a current liability because it will be paid out of current
assets in the near future.

2. Becky Company borrows $ 80,000 on July 1 from the bank by signing a $ 80,000, 10%,
one year note payable.
(a) Prepare a journal entry to record the proceeds of the note.
(b) Prepare the journal entry to record accrued interest at December 31, assuming
adjusting entries are made only at the end of the year.
July 1 Cash............................................80,000
Notes Payable................................................... 80,000
Dec. 31 Interest Expense
Interest Payable ........................ 4,000
($80,000 X 10% X 1/2)................................. 4,000

3. Goodwin Auto Supply does not segregate sales and sales taxes at the time of the sale. The
register total for March 16 is $ 15,540. All sales are subject to a 5% sales tax. Compute
sales taxes payable, and make the entry to record sales taxes payable and sales.
Sales tax payable
(1) Sales = $14,800 = ($15,540 ÷ 1.05)
(2) Sales taxes payable = $740 = ($14,800 X 5%)
Mar. 16 Cash..................................................15,540
Sales .................................................14,800
Sales Taxes Payable......................................... 740

4. Sandy Teter’s regular hourly wage rate is $ 16 and she receives an hourly rate of $ 24 for
work in excess of 40 hours. During a January pay period, Sandy works 47 hours. Sandy’s
federal income tax withholding is $ 95, and she has no voluntary deductions. Compute
 Sandy’s Teter’s gross earnings and net pay for the pay period. (Assume a FICA tax rate
of 8%).
Gross earnings:
Regular pay (40 X $16).......................................$640.00
Overtime pay (7 X $24) ........................................168.00 $808.00
Gross earnings ..................................................................... $808.00
Less: FICA taxes payable ($808 X 8%) ................ $ 64.64
Federal income taxes payable................................. 95.00 159.64
Net pay.................................................................................... $648.36

5. Data for Sandy Teter are presented in problem no. 4. Prepare the journal entries to record
(a) Sandy’s pay for the period and (b) the payment of Sandy’s wages. Use January 15 for
the end of the pay period and the payment date.
Jan. 15 Wages Expense........................................ 808.00
FICA Taxes Payable ($808 X 8%)................ 64.64
Federal Income Taxes Payable ................... 95.00
Wages Payable .......................................... 648.36
Jan. 15 Wages Payable..........................................648.36
Cash ..............................................................648.36

6. Wichita State University sells 4000 season basketball tickets at $ 120 each for its 12-
game home schedule. Give the entry to record (a) the sale of the season tickets and (b) the
revenue earned by playing the first home game.
Cash............................................................720,000
Unearned Basketball Ticket Revenue ....................... 720,000
(To record sale of 4,000 season tickets)
Unearned Basketball Ticket Revenue ........60,000
Basketball Ticket Revenue............................................ 60,000
(To record basketball ticket revenues earned)

7. Shaffer Inc. is considering two alternatives to finance its construction of a new $ 2

million plant.
(a) Issuance of 200,000 shares of common stock at the market price of $ 10 per share
(b) Issuance of $ 2 million, 8% bonds at par.

Complete the following table, and indicate which alternative is preferable.

Issue Stock Issue Bonds

Income before Interest & $ 900,000 $ 900,000
taxes
Interest expense from bonds -------------- 160000
Income before income taxes $ 900,000 $ 740,000
Income tax expense (30%)
Net income $ 270,000 $ 222,000
 Outstanding shares 200,000 500,000
Earnings per share 1.35 0.444

8. Quincy Corporation issued 4000, 8%, 5-year, $ 1000 bonds dated January 1, 2006, at
100.
(a) Prepare the journal entry to record the sale of these bonds on January 1, 2006.
(b) Prepare the journal entry to record the first interest payment on July 1, 2006 (interest
payable semiannually)
(c) Prepare the adjusting journal entry on December 31, 2006, to record interest expense.
9. Sandstone Company issues $ 1 million, 10-year, 8% bonds at 97, with interest payable on
July 1 and January 1.
(a) Prepare a journal entry to record the sale of these bonds on January 1, 2006
(b) Assuming instead that the above bonds sold for 104, prepare the journal entry to
record the sale of these bonds on January 1, 2006.
10. Corolla Company has issued three different bonds during 2006. Interest is payable
semiannually on each of these bonds.
(1.) On January 1, 2006, 1000, 8%, 5-year, $ 1000 bonds dated January 1, 2006, were
issued at face value
(2.) On July 1, $ 500,000, 9%, 5-year bonds dated July 1, 2006, was issued at 102.
(3.) On September 1, $ 200,000, 7%, 5-year bonds dated September 1, 2006 was issued at
99.

Prepare the journal entry to record each bond transaction at the date of issuance.

11. The balance sheet for Jones Company reports the following information on July 1, 2006.
Long-term Liabilities
Bond Payable $1,000,000
Less: Discounts on bonds payable 60,000 $940,000
Jones decides to redeem these bonds at 103 after paying semiannual interest. Prepare the
journal entry to record the redemption on July 1, 2006.
12. McEntire Inc. issues a $400,000, 10%, 10-year mortgage note on December 31, 2006, to
obtain financing for a new building. The terms provide for semiannual installment
payments of $32,097. Prepare the entry to record the mortgage loan on December 31,
2006, and the first installment payment.