Q20Q. The creditors of Chester Company... [FREE SOLUTION]

Chapter 5: Q20Q. (page 238)

The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer

Short Answer

Expert verified

Promissory notes must bereflected in the balance sheet as a long-term liability.

Step by step solution

Definition of Creditors

All the individuals or companies from which the business entity has borrowed money or purchased inventory are creditors. These are reported as liabilities of the business entity.

Reporting Promissory Notes

The business entity must report the promissory note as long-term liabilities in the company鈥檚 balance sheet. The balance sheet must also include the term related to a promissory note. At the end of each year after calculation of the profit. The business entity must transfer the promissory note balance from long-term liability to current liability, equal to two-thirds of profit generated. Such transfer must be followed until the business entity fully liquidates its promissory note.

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Particular	Debit	Credit
Cash	\(197,000
Sales Revenue		\)8,100,000
Debt investment (trading) (at cost \(145,000)	153,000
Cost of goods sold	4,800,000
Debt investment (long-term)	299,000
Equity Investment (long-term)	277,000
Notes payable (Short-term)		90,000
Account payable		455,000
Selling expenses	2,000,000
Investment revenue		63,000
Land	260,000
Buildings	1,040,000
Dividend payable		136,000
Accrued Liabilities		96,000
Accounts Receivable	435,000
Accumulated depreciation 鈥� Building		152,000
Allowance for doubtful accounts		25,000
Administrative expenses	900,000
Interest expenses	211,000
Inventory	597,000
Gain		80,000
Notes payable		900,000
Equipment	600,000
Bonds payable		1,000,000
Accumulated depreciation 鈥� Equipment		60,000
Franchises	160,000
Common stock		1,000,000
Treasury stock	191,000
Patents	195,000
Retained Earnings		78,000
Paid-in-capital in excess of par		80,0000
Total	\)12,315,000	$12,315,000

Goodwill	\(125,000	Accumulated depreciation - equipment	\)292,000
Payroll tax payable	177,591	Inventory	239,800
Bond payable	300,000	Rent payable (short-term)	45,000
Discount on bond payable	15,000	Income tax payable	98,362
Cash	360,000	Rent payable (long-term)	480,000
Land	480,000	Common stock, \(1 par value	200,000
Notes receivable	445,700	Preferred stock, \)10 par value	150,000
Note payable	265,000	Prepaid expenses	87,920
Account payable	490,000	Equipment	1,470,000
Retained earnings		Debt investment (trading)	121,000
Income tax receivable	97,630	Accumulated depreciation 鈥� building	270,200
Note payable (Long-term)	1,600,000	Buildings	1,640,000

KISHWAUKEE CORPORATION
Balance Sheet
December 31, 2017
Assets
Goodwill (Note 2)	\(120,000
Building (Note 1)	1,640,000
Inventory	312,100
Land	950,000
Accounts receivable	170,000
Treasury Stock (50,000 shares)	87,000
Cash on hand	175,900
Assets allocated to trustee for plant expansion
Cash in bank	70,000
Debt investment (held to maturity)	138,000
	\)3,663,000

Equities
Note payable (Note 3)	\(600,000
Common stock authorized and issue, 1,000,000 shares no par	1,150,000
Retained earnings	103,000
Non-controlling Interest	55,000
Appreciation capital (Note 1)	570,000
Income tax payable	75,000
Reserve for depreciation recorded to the date of building	410,000
	\)3,663,000

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Short Answer

Step by step solution

Definition of Creditors

Reporting Promissory Notes

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