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Chapter 12: Q32PGA_1 (page 663)

Journalizing liability transactions and reporting them on the balance

sheet

The following transactions of Johnson Pharmacies occurred during 2018 and 2019:

2018

Mar. 1 Borrowed \(450,000 from Coconut Creek Bank. The 15-year, 5% note requires

payments due annually, on March 1. Each payment consists of \)30,000 principal

plus one year鈥檚 interest.

Dec. 1 Mortgaged the warehouse for \(250,000 cash with Saputo Bank. The mortgage

requires monthly payments of \)8,000. The interest rate on the note is 12% and

accrues monthly. The first payment is due on January 1, 2019.

31 Recorded interest accrued on the Saputo Bank note.

31 Recorded interest accrued on the Coconut Creek Bank note.

2019

Jan. 1 Paid Saputo Bank monthly mortgage payment.

Feb. 1 Paid Saputo Bank monthly mortgage payment.

Mar. 1 Paid Saputo Bank monthly mortgage payment.

1 Paid first installment on note due to Coconut Creek Bank.

Requirements

1. Journalize the transactions in the Johnson Pharmacies general journal. Round to

the nearest dollar. Explanations are not required.

2. Prepare the liabilities section of the balance sheet for Johnson Pharmacies on

March 1, 2019 after all the journal entries are recorded.

Short Answer

Expert verified

The cash account is debited with $450,000and the 5% notes payable account is credited with $450,000.

Step by step solution

01

Definition of the interest payable

The interest payable is the amount of the interest due at the end of the year.

02

Journal entries

Date

Particulars

Debit

Credit

March 1, 2018

Cash

$450,000

5% Notes Payable

$450,000

(Being entry for the issue of notes)

December 31, 2018

Cash

$250,000

12% Notes Payable

$250,000

(Being entry for the issue of bonds)

December 31, 2018

Interest Expense

$2,500

Interest Payable

$2,500

(Being entry for the accrued interest)

December 31, 2018

Interest Expense

$18,750

Interest Payable

$18,750

(Being entry for the accrued interest)

January 1, 2019

Mortgage Payable

$5,500

Interest Payable

$2,500

Cash

$8,000

(Being entry for the monthly payment)

February 1, 2019

Mortgage Payable

$5,555

Interest Payable

$2,445

Cash

$8,000

(Being entry for the monthly payment)

March 1, 2019

Mortgage Payable

$5,611

Interest Payable

$2,389

Cash

$8,000

(Being entry for the monthly payment)

March 1, 2019

Interest Payable

$18,750

Interest Expense

$3,750

Notes Payable

$30,000

Cash

$52,500

(Being entry for the payment of the first instalment)

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Most popular questions from this chapter

Analyzing alternative plans to raise money

SB Electronics is considering two plans for raising \(4,000,000 to expand operations.

Plan A is to issue 9% bonds payable, and plan B is to issue 500,000 shares of common

stock. Before any new financing, SB Electronics has net income of \)350,000 and

300,000 shares of common stock outstanding. Management believes the company can

use the new funds to earn additional income of $700,000 before interest and taxes.

The income tax rate is 30%. Analyze the SB Electronics situation to determine which

plan will result in higher earnings per share. Use Exhibit 12-6 as a guide.

Analyzing and journalizing bondtransactions

On January1, 2018, Doctors Credit Union (DCU) issued 7%, 20-year bondspayable with face value of $200,000. The bonds pay interest on June 30 andDecember 31.

Requirements

1. If the market interest rate is 5% when DCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.

2. If the market interest rate is 8% when DCU issues its bonds, will the bonds bepriced at face value, at a premium, or at a discount? Explain.

3. The issue price of the bonds is 93. Journalize the following bond transactions:

a. Issuance of the bonds on January 1, 2018.

b. Payment of interest and amortization on June 30, 2018.

c. Payment of interest and amortization on December 31, 2018.

d. Retirement of the bond at maturity on December 31, 2037, assuming the lastinterest payment has already been recorded.

Determine whether the following bonds payable will be issued at face value, at a premium, or at a discount:

3. A 10% bonds payable is issued when the market interest rate is 8%.

4. A 10% bonds payable is issued when the market interest rate is 10%.

5. A 10% bonds payable is issued when the market interest rate is 12%.

Bill and Edna had been married two years and had just reached the point where they

had enough savings to start investing. Bill鈥檚 uncle Dave told them that he had recently

inherited some very rare railroad bonds from his grandmother鈥檚 estate. He wanted

to help Bill and Edna get a start in the world and would sell them 50 of the bonds at

\(100 each. The bonds were dated 1873, beautifully engraved, showing a face value of

\)1,000 each. Uncle Dave pointed out that 鈥淯nited States of America鈥� was printed

prominently at the top and that the U.S. government had established a sinking fund to

retire the old railroad bonds. A sinking fund is a fund established for the purpose of

repaying the debt. It allows the organization (the U.S. government, in this example)

to set aside money over time to retire the bonds. All Bill and Edna needed to do was

hold on to them until the government contacted them, and they would eventually get

the full \(1,000 for each bond. Bill and Edna were overjoyed鈥攗ntil a year later when

they saw the exact same bonds for sale at a coin and stamp shop priced as 鈥渃ollectors鈥�

items鈥� for \)9.95 each!

Requirements

1. If a company goes bankrupt, what happens to the bonds it issued and the investorswho bought the bonds?

2. When investing in bonds, how can you tell whether the bond issue is a legitimatetransaction?

3. Is there a way to determine the relative risk of corporate bonds?

Determining future value

David is entering high school and is determined to save money for college. David feels

he can save $5,000 each year for the next four years from his part-time job. If David is

able to invest at 6%, how much will he have when he starts college?
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