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Chapter 13: Question 8Q (page 715)
How should a debt callable by the creditor be reported in the debtor鈥檚 financial statements?
Debt that is callable by the creditor should be grouped under current liability.
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(Premium Entries and Financial Statement Presentation) Sycamore Candy Company offers an MP3 download (seven-single medley) as a premium for every five candy bar wrappers presented by customers together with \(2.50. The candy bars are sold by the company to distributors for 30 cents each. The purchase price of each download code to the company is \)2.25. In addition, it costs 50 cents to distribute each code. The results of the premium plan for the years 2017 and 2018 are as follows. (All purchases and sales are for cash.)
2017 2018
MP3 codes purchased 250,000 330,000
Candy bars sold 2,895,400 2,743,600
Wrappers redeemed 1,200,000 1,500,000
2017 wrappers expected to be redeemed in 2018 290,000
2018 wrappers expected to be redeemed in 2019 350,000
Instructions
(a) Prepare the journal entries that should be made in 2017 and 2018 to record the transactions related to the premium plan of the Sycamore Candy Company.
(b) Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the balance sheet and the income statement at the end of 2017 and 2018
(Fair Value Option) Presented below is selected information related to the financial instruments of
Dawson Company at December 31, 2017. This is Dawson Company鈥檚 first year of operations.
Carrying Fair Value
Amount (at December 31)
Investment in debt securities (intent is to hold to maturity) \( 40,000 \) 41,000
Investment in Chen Company stock 800,000 910,000
Bonds payable 220,000 195,000
Instructions
(a) Dawson elects to use the fair value option for these investments. Assuming that Dawson鈥檚 net income is $100,000 in2017 before reporting any securities gains or losses determine Dawson鈥檚 net income for 2017. Assume that the differencebetween the carrying value and fair value is due to credit deterioration.
(b) Record the journal entry, if any, necessary at December 31, 2017, to record the fair value option for the bonds payable
(Refinancing of Short-Term Debt) On December 31, 2017, Hattie McDaniel Company had \(1,200,000 of short-term debt in the form of notes payable due February 2, 2018. On January 21, 2018, the company issued 25,000 shares of its common stock for \)38 per share, receiving \(950,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2018, the proceeds from the stock sale, supplemented by an additional \)250,000 cash, are used to liquidate the \(1,200,000 debt. The December 31, 2017, balance sheet is issued on February 23, 2018.
Instructions
Show how the \)1,200,000 of short-term debt should be presented on the December 31, 2017, balance sheet, including note disclosure
E13-5 (L01) (Adjusting Entry for Sales Tax) During the month of June, Rowling Boutique recorded cash sales of \(233,200 and credit sales of \)153,700, both of which include the 6% sales tax that must be remitted to the state by July 15.
Instructions
Prepare the adjusting entries that should be recorded to fairly present the June 30 financial statements.
(a) Assuming no Fair Value Adjustment account balance at the beginning of the year, prepare the adjusting entry at the end of the year if Laura Company鈥檚 available-for-sale debt securities have a fair value of \(60,000 below cost.
(b) Assume the same information as part (a), except that Laura Company has a debit balance in its Fair Value Adjustment account of \)10,000 at the beginning of the year. Prepare the adjusting entry at year-end.
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