Distinguish between a current liability, such as accounts payable, and a provision.
> (a) From what sources might a corporation obtain funds through long-term debt? (b) What is a bond indenture? What does it contain? (c) What is a mortgage?
> What evidence is necessary to demonstrate the ability to consummate the refinancing of short-term debt?
> How are the terms “probable,” “reasonably possible,” and “remote” related to contingent liabilities?
> Schmitt Company must make computations and adjusting entries for the following independent situations at December 31, 2015. 1. Its line of amplifiers carries a 3-year warranty against defects. On the basis of past experience the estimated warranty cos
> Under what conditions must an employer accrue a liability for the cost of compensated absences?
> How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?
> Kobayashi Corporation reports in the current liability section of its statement of financial position at December 31, 2014 (its year-end), short-term obligations of $15,000,000, which includes the current portion of 12% long-term debt in the amount of
> The following situations relate to Bolivia Company. 1. Bolivia provides a warranty with all its products it sells. It estimates that it will sell 1,000,000 units of its product for the year ended December 31, 2014, and that its total revenue for the p
> Presented below are two different situations related to Mckee Corporation’s debt obligations. Mckee’s next financial reporting date is December 31, 2014. The financial statements are authorized for issuance on March 1, 2015. 1. Mckee has a
> Karen Austin Inc. has issued three types of debt on January 1, 2014, the start of the company’s fiscal year. (a) $10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%. (b) $25 million par of 10-ye
> What is an onerous contract? Give two examples of an onerous contract.
> Below is a payroll sheet for Otis Import Company for the month of September 2014. The company is allowed a 1% unemployment compensation rate by the state; the federal unemployment tax rate is 0.8% and the maximum for both is $7,000. Assume a 10% federa
> Contrast the cash-basis method and the accrual method of accounting for warranty costs.
> Cedarville Company pays its office employee payroll weekly. Below is a partial list of employees and their payroll data for August. Because August is their vacation period, vacation pay is also listed. Assume that the federal income tax withheld i
> On January 1, 2014, Nichols Company issued for $1,085,800 its 20-year, 11% bonds that have a maturity value of $1,000,000 and pay interest semiannually on January 1 and July 1. Bond issue costs were not material in amount. Below are three presentations
> Rodriguez Corporation includes the following items in its liabilities at December 31, 2014. 1. Notes payable, $25,000,000, due June 30, 2015. 2. Deposits from customers on equipment ordered by them from Rodriguez, $6,250,000. 3. Salaries and wages p
> The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/Marksand-Spencer-Annual-report-and-financial-statements-201
> Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from
> On January 1, 2014, Aumont Company sold 12% bonds having a maturity value of $500,000 for $537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2014, and mature January 1, 2019, with interest payable December 31 o
> Assume the same information as in IFRS14-5, except that the bonds were issued at 84.95 to yield 12%. Prepare the journal entries to record (a) The issuance of the bonds, (b) The payment of interest and related amortization on July 1, 2014, and (c) The
> Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2014, at 119.792 to yield 8%. Interest is payable semiannually on July 1 and January 1. Prepare the journal entries to record (a) The issuance of the bonds, (b) The payment of interest
> Assume the bonds in IFRS14-3 were issued for $644,636 and the effective-interest rate is 6%. Prepare the company’s journal entries for (a) The January 1 issuance, (b) The July 1 interest payment, and (c) The December 31 adjusting entry.
> Strickland Company owes $200,000 plus $18,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2014, Strickland’s business deteriorated due to a faltering regional economy. On December 31, 2014, Moran State Bank ag
> At December 31, 2014, Redmond Company has outstanding three long-term debt issues. The first is a $2,000,000 note payable which matures June 30, 2017. The second is a $6,000,000 bond issue which matures September 30, 2018. The third is a $12,500,000 si
> Fallen Company commonly issues long-term notes payable to its various lenders. Fallen has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Fallen has elected to use the fair value op
> Zopf Company sells its bonds at a premium and applies the effective-interest method in amortizing the premium. Will the annual interest expense increase or decrease over the life of the bonds? Explain.
> On January 1, 2014, Margaret Avery Co. borrowed and received $400,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Avery agrees to supply the customer’s in
> What are the two methods of amortizing discount and premium on bonds payable? Explain each.
> Presented below are three independent situations. (a) CeCe Winans Corporation incurred the following costs in connection with the issuance of bonds: (1) Printing and engraving costs, $12,000; (2) legal fees, $49,000; and (3) commissions paid to underwrit
> Assume the same information as E14-6. In E14-6 Devon Harris Company sells 10% bonds having a maturity value of $2,000,000 for $1,855,816. The bonds are dated January 1, 2014, and mature January 1, 2019. Interest is payable annually on January 1. I
> On January 1, 2014, JWS Corporation issued $600,000 of 7% bonds, due in 10 years. The bonds were issued for $559,224, and pay interest each July 1 and January 1. Prepare the company’s journal entries for (a) The January 1 issuance, (b) The July 1 inter
> Devon Harris Company sells 10% bonds having a maturity value of $2,000,000 for $1,855,816. The bonds are dated January 1, 2014, and mature January 1, 2019. Interest is payable annually on January 1. Instructions Set up a schedule of interest expense
> Assume the same information as in E14-4, except that Celine Dion Company uses the effective-interest method of amortization for bond premium or discount. In E14-4 Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2014, at 102. I
> Celine Dion Company issued $600,000 of 10%, 20-year bonds on January 1, 2014, at 102. Interest is payable semiannually on July 1 and January 1. Dion Company uses the straight-line method of amortization for bond premium or discount. Instructions Prep
> The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of $600 per month plus 5% of yearly profits over $500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad deb
> Presented below are two independent situations. 1. On January 1, 2014, Simon Company issued $200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1. 2. On June 1, 2014, Garfunkel Company issued
> The following items are found in the financial statements. (a) Discount on bonds payable. (b) Interest expense (credit balance). (c) Unamortized bond issue costs. (d) Gain on repurchase of debt. (e) Mortgage payable (payable in equal amounts over
> Presented below are various account balances of K.D. Lang Inc. (a) Unamortized premium on bonds payable, of which $3,000 will be amortized during the next year. (b) Bank loans payable of a winery, due March 10, 2018. (The product requires aging for 5
> Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.
> Shonen Knife Corporation has elected to use the fair value option for one of its notes payable. Thenote was issued at an effective rate of 11% and has a carrying value of $16,000. At year-end, Shonen Knife’s borrowing rate has declined; the fair
> Shlee Corporation issued a 4-year, $60,000, zero-interest-bearing note to Garcia Company on January 1, 2014, and received cash of $60,000. In addition, Shlee agreed to sell merchandise to Garcia at an amount less than regular selling price over the 4-yea
> Presented below are two independent situations. (a) On January 1, 2014, Robin Wright Inc. purchased land that had an assessed value of $350,000 at the time of purchase. A $550,000, zero-interest-bearing note due January 1, 2017, was given in exchange. Th
> On June 30, 2014, Mischa Auer Company issued $4,000,000 face value of 13%, 20-year bonds at $4,300,920, a yield of 12%. Auer uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and Decem
> How is the present value of a non-interest-bearing note computed?
> Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of $330,000 plus $33,000 of accrued interest. The note is due today, December 31, 2014. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued in
> Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its $5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate
> Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with United Bank. Perkins Inc.&rsq
> What is the “call” feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?
> Samantha Cordelia, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why GAAP requires that this method be used instead of the straight-
> Presented on the next page are four independent situations. (a) On March 1, 2015, Wilke Co. issued at 103 plus accrued interest $4,000,000, 9% bonds. The bonds are dated January 1, 2015, and pay interest semiannually on July 1 and January 1. In additi
> Sabonis Cosmetics Co. purchased machinery on December 31, 2013, paying $50,000 down and agreeing to pay the balance in four equal installments of $40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price. Instructio
> On December 31, 2014, Faital Company acquired a computer from Plato Corporation by issuing a $600,000 zero-interest-bearing note, payable in full on December 31, 2018. Faital Company’s credit rating permits it to borrow funds from its several lin
> On April 1, 2014, Seminole Company sold 15,000 of its 11%, 15-year, $1,000 face value bonds at 97. Interest payment dates are April 1 and October 1, and the company uses the straight-line method of bond discount amortization. On March 1, 2015, Seminole
> Presented below are selected transactions on the books of Simonson Corporation. May 1, 2014 Bonds payable with a par value of $900,000, which are dated January 1, 2014, are sold at 106 plus accrued interest. They are coupon bonds, bear interest at 12%
> In each of the following independent cases the company closes its books on December 31. 1. Sanford Co. sells $500,000 of 10% bonds on March 1, 2014. The bonds pay interest on September 1 and March 1. The due date of the bonds is September 1, 2017. The
> Holiday Company issued its 9%, 25-year mortgage bonds in the principal amount of $3,000,000 on January 2, 2000, at a discount of $150,000, which it proceeded to amortize by charges to expense over the life of the issue on a straight-line basis. The ind
> How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.
> Good-Deal Inc. developed a new sales gimmick to help sell its inventory of new automobiles. Because many new car buyers need financing, Good-Deal offered a low down payment and low car payments for the first year after purchase. It believes that this p
> Venezuela Co. is building a new hockey arena at a cost of $2,500,000. It received a down payment of $500,000 from local businesses to support the project, and now needs to borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,
> Will the amortization of Discount on Bonds Payable increase or decrease Bond Interest Expense? Explain.
> The following amortization and interest schedule reflects the issuance of 10-year bonds by Capulet Corporation on January 1, 2008, and the subsequent interest payments and charges. The company’s year-end is December 31, and financial statements a
> Vargo Corp. owes $270,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2014. Because Vargo Corp. is in financial trouble, First Trust agrees to extend the maturity date to December 31, 2016, reduce the principal to $220,000, and red
> Gottlieb Co. owes $199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some property and cancel the entire debt. The property has a book value of $90,000 and a fair valu
> Using the same information as in E14-22 and E14-24, answer the following questions related to American Bank (creditor). In E14-22 and E14-24 On December 31, 2014, the American Bank enters into a debt restructuring agreement with Barkley Company, whic
> Use the same information as in E14-22 above except that American Bank reduced the principal to $1,900,000 rather than $2,400,000. On January 1, 2018, Barkley pays $1,900,000 in cash to American Bank for the principal. In E14-22 On December 31, 2014,
> Using the same information as in E14-22, answer the following questions related to American Bank (creditor). In E14-22 On December 31, 2014, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing
> On December 31, 2014, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modif
> On November 24, 2014, 26 passengers on Windsor Airlines Flight No. 901 were injured upon landing when the plane skidded off the runway. Personal injury suits for damages totaling $9,000,000 were filed on January 11, 2015, against the airline by 18 inju
> Potlatch Corporation has issued various types of bonds such as term bonds, income bonds, and debentures. Differentiate between term bonds, mortgage bonds, debenture bonds, income bonds, callable bonds, registered bonds, bearer or coupon bonds, converti
> Oil Products Company purchases an oil tanker depot on January 1, 2014, at a cost of $600,000. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It
> Presented below are three independent situations. Answer the question at the end of each situation. 1. During 2014, Salt-n-Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa’s attorneys have indicated that they believe it is pr
> No Doubt Company includes 1 coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2014, No Doubt Company purchased 8,800 premiums at 80 cents each and sold 110,000 boxes of soap powder at $
> How should a debt callable by the creditor be reported in the debtor’s financial statements?
> Sheryl Crow Equipment Company sold 500 Rollomatics during 2014 at $6,000 each. During 2014, Crow spent $20,000 servicing the 2-year warranties that accompany the Rollomatic. All applicable transactions are on a cash basis. Instructions (a) Prepare 20
> Soundgarden Company sold 200 color laser copiers in 2014 for $4,000 apiece, together with a one-year warranty. Maintenance on each copier during the warranty period averages $330. Instructions (a) Prepare entries to record the sale of the copiers and
> Green Day Hardware Company’s payroll for November 2014 is summarized below. At this point in the year, some employees have already received wages in excess of those to which payroll taxes apply. Assume that the state unemployment tax is 2.5%
> The payroll of YellowCard Company for September 2013 is as follows. Total payroll was $480,000, of which $110,000 is exempt from Social Security tax because it represented amounts paid in excess of $113,700 to certain employees. The amount paid to empl
> During the month of June, Rowling Boutique had 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 entry that should be recorded
> Define (a) a contingency and (b) a contingent liability.
> Assume the facts in E13-5 except that Matt Broderick Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. The company used the following projected rates
> Matt Broderick Company began operations on January 2, 2013. It employs 9 individuals who work 8-hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the y
> On December 31, 2014, Kate Holmes Company has $7,000,000 of short-term debt in the form of notes payable to Gotham State Bank due in 2015. On January 28, 2015, Holmes enters into a refinancing agreement with Gotham that will permit it to borrow up to 6
> On December 31, 2014, Hattie McDaniel Company had $1,200,000 of short-term debt in the form of notes payable due February 2, 2015. On January 21, 2015, the company issued 25,000 shares of its common stock for $38 per share, receiving $950,000 proceeds
> The following are selected 2014 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%
> How would each of the following items be reported on the balance sheet? (a) Accrued vacation pay. (b) Estimated taxes payable. (c) Service warranties on appliance sales. (d) Bank overdraft. (e) Employee payroll deductions unremitted. Debts to be p
> Wynn Company offers a set of building blocks to customers who send in 3 UPC codes from Wynn cereal, along with 50¢. The block sets cost Wynn $1.10 each to purchase and 60¢ each to mail to customers. During 2014, Wynn sold 1,200,000 boxes of cereal. The c
> Leppard Corporation sells DVD players. The corporation also offers its customers a 2-year warranty contract. During 2014, Leppard sold 20,000 warranty contracts at $99 each. The corporation spent $180,000 servicing warranties during 2014, and it estimate
> Streep Factory provides a 2-year warranty with one of its products which was first sold in 2014. In that year, Streep spent $70,000 servicing warranty claims. At year-end, Streep estimates that an additional $400,000 will be spent in the future to servic
> Faith Battle operates a health food store, and she has been the only employee. Her business is growing, and she is considering hiring some additional staff to help her in the store. Explain to her the various payroll deductions that she will have to acco
> Calaf’s Drillers erects and places into service an off-shore oil platform on January 1, 2015, at a cost of $10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in 10 years. Calaf estimates it will cost
> Scorcese Inc. is involved in a lawsuit at December 31, 2014. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not p
> Mayaguez Corporation provides its officers with bonuses based on net income. For 2014, the bonuses total $350,000 and are paid on February 15, 2015. Prepare Mayaguez’s December 31, 2014, adjusting entry and the February 15, 2015, entry.
> Kasten Inc. provides paid vacations to its employees. At December 31, 2014, 30 employees have each earned 2 weeks of vacation time. The employees’ average salary is $500 per week. Prepare Kasten’s December 31, 2014, adjusting entry.
> Lexington Corporation’s weekly payroll of $24,000 included FICA taxes withheld of $1,836, federal taxes withheld of $2,990, state taxes withheld of $920, and insurance premiums withheld of $250. Prepare the journal entry to record Lexington’s payroll.
> Dillons Corporation made credit sales of $30,000 which are subject to 6% sales tax. The corporation also made cash sales which totaled $20,670 including the 6% sales tax. (a) Prepare the entry to record Dillons’ credit sales. (b) Prepare the entry to r
> Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client&r
> Sport Pro Magazine sold 12,000 annual subscriptions on August 1, 2014, for $18 each. Prepare Sport Pro’s August 1, 2014, journal entry and the December 31, 2014, annual adjusting entry, assuming the magazines are published and delivered monthly.
> Takemoto Corporation borrowed $60,000 on November 1, 2014, by signing a $61,350, 3-month, zero-interest-bearing note. Prepare Takemoto’s November 1, 2014, entry; the December 31, 2014, annual adjusting entry; and the February 1, 2015, entry.
> Upland Company borrowed $40,000 on November 1, 2014, by signing a $40,000, 9%, 3-month note. Prepare Upland’s November 1, 2014, entry; the December 31, 2014, annual adjusting entry; and the February 1, 2015, entry.
> Under what conditions is an employer required to accrue a liability for sick pay? Under what conditions is an employer permitted but not required to accrue a liability for sick pay?