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Chapter 13: Q2E (page 693)

E13-2 (L01) EXCEL (Accounts and Notes payable) The followingare selected 2017 transactions of Sean Astin Corporation.

Sept.1 Purchased inventory from Encino Company on account for \(50,000. Astin records purchases gross and uses a periodic inventory system.

Oct. 1 Issued a \)50,000, 12-month, 8% note to Encino in payment of account.

Oct. 1Borrowed \(50,000 from the Shore Bank by signing a 12-month,zero- interest-bearing \)54,000 note.

Instructions

(a) Prepare journal entries for the selected transactions above.

(b) prepare adjusting entries at December 31.

(c) Compute the total net liability to be reported on the December 31balancesheetfor:

(1) The interest-bearing note.

(2) The zero-interest-bearing note.

Short Answer

Expert verified

The total liability of interest bearing noteis $51,000and for zero interest bearing note is $51,000.

Step by step solution

01

Step 1:Meaning of Journal

Journal refers to recording a business's monetary transactions in the manner in which they occurred.

02

Showing Journal entries for part (a)

Date

Titles and explanation

Debit ($)

Credit ($)

Sept 1

Purchases

50,000

Account payable

50,000

(To record purchases of inventory)

Oct 1

Accounts Payable

4,000

Notes Payable

4,000

(To record issuance of notes payable)

Oct 1

Bank

50,000

Discount on notes payable

4,000

Notes payable

54,000

(To amount borrowed from bank against note payable)

03

 Step 3: Showing adjusting journal entries part (b)

Date

Titles and explanation

Debit ($)

Credit ($)

Dec 31

Interest Expenses

1,000

Interest payable

1,000

(To interest expense is recorded)

Dec 31

Interest Expenses

1,000

Discount on notes payable

1,000

(To record interest expense)

04

Computation of total net liability on December 31 balance sheet

Calculation of interest bearing note

滨苍迟别谤别蝉迟鈥塨别补谤颈苍驳鈥塶辞迟别=狈辞迟别蝉鈥塸补测补产濒别+鈥塈苍迟别谤别蝉迟鈥塸补测补产濒别=$50,000+$1,000=$51,000

Calculation of zero interest bearing note

窜别谤辞鈥塱苍迟别谤别蝉迟鈥塨别补谤颈苍驳鈥塶辞迟别=狈辞迟别蝉鈥塸补测补产濒别鈭�discount=$54,000鈭�($4,000鈭�$1,000)=$51,000

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Most popular questions from this chapter

(Available-for-Sale and Held-to-Maturity Debt Securities Entries) The following information relates to the debt

securities investments of Wildcat Company.

1. On February 1, the company purchased 10% bonds of Gibbons Co. having a par value of \(300,000 at 100 plus accrued interest.

Interest is payable on April 1 and October 1.

2. On April 1, semiannual interest is received

3. On July 1, 9% of bonds of Sampson, Inc. were purchased. These bonds with a par value of \)200,000 were purchased at 100

plus accrued interest. Interest dates are June 1 and December 1.

4. On September 1, bonds with a par value of $60,000, purchased on February 1, are sold at 99 plus accrued interest.

5. On October 1, semiannual interest is received.

6. On December 1, semiannual interest is received.

7. On December 31, the fair value of the bonds purchased February 1 and July 1 were 95 and 93, respectively.

Instructions

(a) Prepare any journal entries you consider necessary, including year-end entries (December 31), assuming these are

available-for-sale securities.

(b) If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part (a).

Explain the accounting for an assurance-type warranty.

(Loss Contingencies: Entries and Essays) Polska Corporation, in preparation of its December 31, 2017, financial statements, is attempting to determine the proper accounting treatment for each of the following situations.

1. As a result of uninsured accidents during the year, personal injury suits for \(350,000 and \)60,000 have been filed against the company. It is the judgment of Polska鈥檚 legal counsel that an unfavorable outcome is unlikely in the \(60,000 case but that an unfavorable verdict approximating \)250,000 will probably result in the \(350,000 case.

2. Polska owns a subsidiary in a foreign country that has a book value of \)5,725,000 and an estimated fair value of \(9,500,000. The foreign government has communicated to Polska its intention to expropriate the assets and business of all foreign investors. On the basis of settlements other firms have received from this same country, Polska expects to receive 40% of the fair value of its properties as final settlement.

3. Polska鈥檚 chemical product division consisting of five plants is uninsurable because of the special risk of injury to employees and losses due to fire and explosion. The year 2017 is considered one of the safest (luckiest) in the division鈥檚 history because no loss due to injury or casualty was suffered. Having suffered an average of three casualties a year during the rest of the past decade (ranging from \)60,000 to $700,000), management is certain that next year the company will probably not be so fortunate.

Instructions

(a) Prepare the journal entries that should be recorded as of December 31, 2017, to recognize each of the situations above.

(b) Indicate what should be reported relative to each situation in the financial statements and accompanying notes. Explain why.

P17-2 (L01) (Available-for-Sale Debt Securities) On January 1, 2017, Novotna Company purchased \(400,000, 8% bonds of

Aguirre Co. for \)369,114. The bonds were purchased to yield 10% interest. Interest is payable semiannually on July 1 and

January 1. The bonds mature on January 1, 2022. Novotna Company uses the effective-interest method to amortize discount

or premiums. On January 1, 2019, Novotna Company sold the bonds for \(370,726 after receiving interest to meet its liquidity

needs.

Instructions

(a) Prepare the journal entry to record the purchase of bonds on January 1. Assume that the bonds are classified as available for-

sale.

(b) Prepare the amortization schedule for the bonds.

(c) Prepare the journal entries to record the semiannual interest on July 1, 2017, and December 31, 2017.

(d) If the fair value of Aguirre bonds is \)372,726 on December 31, 2018, prepare the necessary adjusting entry. (Assume the

On December 31, 2017, the fair value adjustment balance was a debit of $3,375.)

(e) Prepare the journal entry to record the sale of the bonds on January 1, 2019.

Leppard Corporation Sells DVD players. The corporation also offers its customers a 4-year warranty contract. During 2017, Leppard sold 20,000 warranty contracts at \(99 each. The corporation spent \)180,000 servicing warranties during 2017. Prepare Leppard鈥檚 journal entries for (a) the sale of contracts, (b) the cost of servicing the warranties, and (c) the recognition of warranty revenue. Assume the service costs are inventory costs.
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