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Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon
bank approval. The amount available under the line of credit is $18.8 million at the banks
prime rate.
Arranged a three-month bank loan of $3.76 million with Parish Bank under the line of credit
agreement. Interest at the prime rate of 8% was payable at maturity.
Paid the 8% note at maturity.
Supported by the credit line, issued $9.4 million of commercial paper on a nine-month note.
Interest was discounted at issuance at a 7% discount rate.
Recorded any necessary adjusting entry(s).
Paid the commercial paper at maturity.
Required:
Prepare the appropriate journal entries through the maturity of each liability. (In cases where no entry is
required, please select the option "No journal entry required" for your answer to grade correctly.
Leave no cells blank - be certain to enter "0" wherever required. Do not round intermediate
calculations. Round your final answers to the nearest dollar amount. Omit the "$" sign in your
response.)
Date
2011
Jan. 13
General Journal
No journal entry is required
Debit
0
Feb. 1
Cash
3,760,000
Notes payable
May 1
3,760,000
Interest expense
75,200
Notes payable
3,760,00
Cash
Dec. 1
Cash
Credit
8,906,50
493,500
Notes payable
Dec. 31
Interest expense
9,400,000
54,833
54,833
2012
Sept. 1
Interest expense
Discount on notes payable
Notes payable
Cash
438,667
9,400,000
9,400,000
Explanation:
2011
May 1
Interest expense ($3,760,000 8% 3/12) = 75,200
Notes payable (face amount) = 3,760,000
Cash ($3,760,000 + 75,200) = 3,835,200
Dec. 1
Cash (difference) = 8,906,500
Discount on notes payable ($9,400,000 7% 9/12) = 493,500
Notes payable (face amount) = 9,400,000
Dec. 31
The effective interest rate is 7.3879% ($493,500 $8,906,500) 12/9. So, properly, interest should be
recorded at that rate times the outstanding balance times one-twelfth of a year:
Interest expense ($8,906,500 7.3879% 1/12) = 54,833
Discount on notes payable = 54,833
However the same results are achieved if interest is recorded at the discount rate times the maturity
amount times one-twelfth of a year:
Interest expense ($9,400,000 7% 1/12) = 54,833.
Discount on notes payable = 54,833
2012
Sept. 1
Interest expense ($9,400,000 7% 8/12)* = 438,667
Discount on notes payable = 438,667
Notes payable (balance) = 9,400,000
Required:
(1-a) Does this situation represent a loss contingency?
Yes
(1-b) How should Cupola account for it?
Estimated warranty liability is credited and warranty expense is debited in 2011.
(2) Prepare journal entries that summarize sales of the awnings (assume all credit sales) and any
aspects of the warranty that should be recorded during 2011. (Omit the "$" sign in your response.)
General Journal
Debit
Credit
2011 Sales
Accounts receivable
4,805,000
Sales
4,805,000
168,175
168,175
Actual expenditures
Estimated warranty liability
Cash, wages payable, parts and supplies, etc.
42,044
42,044
(3) What amount should Cupola report as a liability at December 31, 2011? (Omit the "$" sign in your
response.)
Liability
126,131
Explanation:
(1)
This is a loss contingency. There may be a future sacrifice of economic benefits (cost of satisfying the
warranty) due to an existing circumstance (the warranted awnings have been sold) that depends on an
uncertain future event (customer claims).
The liability is probable because product warranties inevitably entail costs. A reasonably accurate
estimate of the total liability for a period is possible based on prior experience. So, the contingent liability
for the warranty is accrued. The estimated warranty liability is credited and warranty expense is debited
in 2011, the period in which the products under warranty are sold.
(2)
Warranty Liability
Actual expenditures
168,175
Estimated liability
126,131
Balance
42,044
10 years
2.
annually
10%
12%
10 years semiannually
10%
12%
3.
10 years semiannually
12%
10%
4.
20 years semiannually
12%
10%
5.
20 years semiannually
12%
12%
Price
$
886,992 .1%
$
885,296 .1%
$
1,124,623 .01%
$
1,171,595 .01%
$
999,998 .1%
Explanation:
1.
Maturity
10 years
886,992
10% $1,000,000
* present value of an ordinary annuity of $1: n = 10, i = 12% (Table 4)
** present value of $1: n = 10, i = 12% (Table 2)
2.
Maturity
20 years
885,296
5% $1,000,000
* present value of an ordinary annuity of $1: n = 20, i = 6% (Table 4)
** present value of $1: n = 20, i = 6% (Table 2)
3.
Maturity
20 years
1,124,623
6% $1,000,000
* present value of an ordinary annuity of $1: n = 20, i = 5% (Table 4)
** present value of $1: n = 20, i = 5% (Table 2)
4.
Maturity
40 years
1,171,595
6% x $1,000,000
* present value of an ordinary annuity of $1: n = 40, i = 5% (Table 4)
** present value of $1: n = 40, i = 5% (Table 2)
5.
Maturity
40 years
999,998
General Journal
Debit
Credit
Jan 1,
2011
Bond investment
70,000,000 0.01%
8,723,51
Cash
61,276,4
(2) Prepare the journal entry to record interest revenue on June 30, 2011 (at the effective rate). (Enter
your answers in dollars not in millions. Round "PV Factor" to 5 decimal places andfinal
answers to the nearest whole dollar amount. Omit the "$" sign in your response.)
Date
June 30,
2011
General Journal
Debit
Cash
2,800,00
263,824
Interest revenue
Credit
3,063,824 0.01%
(3) Prepare the journal entry to record interest revenue on December 31, 2011 (at the effective rate).
(Enter your answers in dollars not in millions. Round "PV Factor" to 5 decimal places andfinal
answers to the nearest whole dollar amount. Omit the "$" sign in your response.)
Date
Dec. 31,
2011
General Journal
Cash
2,800,00
277,016
Interest revenue
$ 2,800,000
$ 70,000,000
12.46221* =
.37689** =
$ 34,894,188
26,382,300
$ 61,276,488
4% $70,000,000
* present value of an ordinary annuity of $1: n = 20, i = 5% (Table 4)
** present value of $1: n = 20, i = 5% (Table 2)
(2) June 30, 2011
Credit
3,077,016 0.01%
Explanation:
(1) January 1, 2011
Interest
Principal
Debit
675,431
(2 Prepare the journal entry to record their issuance by Patey on January 1, 2011. (Do not round PV
) factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)
Date
Jan. 1
General Journal
Debit
Cash
675,431
Discount on bonds
24,569
Bonds payable
Credit
700,000
(3 Prepare an amortization schedule that determines interest at the effective rate each period. (Do not
) round PV factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your
response.)
Cash
Payment
Effective
Interest
Increase in
Balance
Outstanding
Balance
675,431
17,500
20,263
2,763
678,194
17,500
20,346
2,846
681,040
17,500
20,431
2,931
683,971
17,500
20,519
3,019
686,990
17,500
20,610
3,110
690,100
17,500
20,703
3,203
693,303
17,500
20,799
3,299
696,602
17,500
20,898
3,398
700,000
140,000
164,569
24,569
(4 Prepare the journal entry to record interest on June 30, 2011. (Do not round PV factors. Round
) final answer to the nearest dollar amount. Omit the "$" sign in your response.)
Date
June 30
General Journal
Debit
Interest expense
Credit
20,263
2,763
Cash
17,500
(5 What is the amount related to the bonds that Patey will report in its balance sheet at December 31,
) 2011? (Do not round PV factors. Round final answer to the nearest dollar amount. Omit the "$"
sign in your response.)
December 31, 2011 net liability
$
681,040
(6 What is the amount related to the bonds that Patey will report in its income statement for the year
) ended December 31, 2011? (Ignore income taxes.) (Do not round PV factors. Round final answer
to the nearest dollar amount. Omit the "$" sign in your response.)
$
40,609
(7 Prepare the appropriate journal entries at maturity on December 31, 2014. (Do not round PV
) factors. Round final answer to the nearest dollar amount. Omit the "$" sign in your response.)
Date
Dec. 31
General Journal
Interest expense
Debit
Credit
20,898
3,398
Cash
17,500
Dec. 31
Bonds payable
700,000
Cash
700,000
rev: 12_13_2011
Explanation:
(1)
122,845
552,586
675,431
2.500% $700,000
present value of an ordinary annuity of $1: n = 8, i = 3.000% (Table 4)
**
present value of $1: n = 8, i = 3.000% (Table 2)
*
(3)
Cash
Payment
2.500% Face
Amount
1
2
3
4
5
6
7
8
17,500
17,500
17,500
17,500
17,500
17,500
17,500
17,500
140,000
*rounded
(4)
Effective
Interest
3.000% Outstanding Balance
0.030 (675,431) =
0.030 (678,194) =
0.030 (681,040) =
0.030 (683,971) =
0.030 (686,990) =
0.030 (690,100) =
0.030 (693,303) =
0.030 (696,602) =
Increase in
Balance
Discount
Reduction
20,263
20,346
20,431
20,519
20,610
20,703
20,799
20,898*
2,763
2,846
2,931
3,019
3,110
3,203
3,299
3,398
164,569
24,569
Outstanding
Balance
675,431
678,194
681,040
683,971
686,990
690,100
693,303
696,602
700,000
Bonds payable
Less: discount
Initial balance, January
1, 2011
June 30, 2011
discount amortization
Dec. 31, 2011
discount amortization
700,000
(24,569)
675,431
2,763
2,846
681,040
(6)
20,263
20,346
40,609
(7)
$
773,620 0.1%
(2 Prepare the journal entry to record their issuance by National on January 1, 2011. (Round PV factors
) to 5 decimal places. Round your answers to the nearest dollar amount. Omit the "$" sign in
your response.)
Date
Jan. 1
General Journal
Debit
Cash
773,620
26,380
Bonds payable
Credit
800,000 0.1%
(3 Prepare an amortization schedule that determines interest at the effective rate each period. (Round
) PV factors to 5 decimal places. Round your answers to the nearest dollar amount. Omit the "$"
sign in your response.)
Cash
Payment
Effective
Interest
Increase in
Balance
Outstanding
Balance
773,620 0.1%
32,000 0.1%
34,813 0.1%
2,813 0.1%
776,433 0.1%
32,000 0.1%
34,939 0.1%
2,939 0.1%
779,372 0.1%
32,000 0.1%
35,072 0.1%
3,072 0.1%
782,444 0.1%
32,000 0.1%
35,210 0.1%
3,210 0.1%
785,654 0.1%
32,000 0.1%
35,354 0.1%
3,354 0.1%
789,008 0.1%
32,000 0.1%
35,505 0.1%
3,505 0.1%
792,513 0.1%
32,000 0.1%
35,663 0.1%
3,663 0.1%
796,176 0.1%
32,000 0.1%
35,824 0.1%
3,824 0.1%
256,000 0.1%
282,380 0.1%
26,380 0.1%
800,000
(4 Prepare the journal entry to record interest on June 30, 2011. (Round PV factors to 5 decimal
) places. Round your answers to the nearest dollar amount. Omit the "$" sign in your response.)
Date
General Journal
Debit
Credit
June 30
Interest expense
34,813 0.1%
2,813
Cash
32,000
(5 Prepare the appropriate journal entries at maturity on December 31, 2014. (Round PV factors to 5
) decimal places. Round your answers to the nearest dollar amount. Omit the "$" sign in your
response.)
Date
Dec. 31
Dec. 31
General Journal
Debit
Interest expense
Credit
35,824 0.1%
3,824
Cash
32,000
Bonds payable
800,000
Cash
800,000
Explanation:
(1)
211,068
562,552
773,620
4.0% $800,000
present value of an ordinary annuity of $1: n = 8, i = 4.5% (Table 4)
**
present value of $1: n = 8, i = 4.5% (Table 2)
*
(3)
Cash
Payment
4.0% Face
Amount
Effective
Interest
4.5% Outstanding Balance
Increase in
Balance
Discount
Reduction
Outstanding
Balance
773,620
1
2
3
4
5
6
7
8
32,000
32,000
32,000
32,000
32,000
32,000
32,000
32,000
.045 (773,620) =
.045 (776,433) =
.045 (779,372) =
.045 (782,444) =
.045 (785,654) =
.045 (789,008) =
.045 (792,513) =
.045 (796,176) =
256,000
34,813
34,939
35,072
35,210
35,354
35,505
35,663
35,824*
2,813
2,939
3,072
3,210
3,354
3,505
3,663
3,824
282,380
26,380
776,433
779,372
782,444
785,654
789,008
792,513
796,176
800,000
*rounded
(4)
General Journal
Debit
Cash
833,000
17,000
Bonds payable
Credit
850,000 1
(2 Prepare the journal entry to record interest on August 31, 2011. (Omit the "$" sign in your
) response.)
Date
General Journal
Debit
Credit
Aug. 31
Interest expense
64,600 1
850 1
Cash
63,750
(3 Prepare the journal entry to accrue interest on December 31, 2011. (Do not round intermediate
) calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your
response.)
Date
Dec. 31
General Journal
Interest expense
Debit
Credit
43,067 1
567 1
Interest payable
42,500
(4 Prepare the journal entry to record interest on February 28, 2012. (Do not round intermediate
) calculations. Round your answers to the nearest dollar amount. Omit the "$" sign in your
response.)
Date
Feb. 28
General Journal
Debit
Interest expense
21,533
Interest payable
42,500
Credit
283 1
Cash
63,750
Explanation:
(2
August 31, 2011:
)
Interest expense ($63,750 + 850) = 64,600
Discount on bonds payable ($17,000 20) = 850
Cash (7.5% $850,000) = 63,750
(3
December 31, 2011:
)
Interest expense (4/6 $64,600) = 43,067
Discount on bonds payable (4/6 $850) = 567
Interest payable (4/6 $63,750) = 42,500
(4
February 28, 2012:
)
General Journal
Component inventory
Debit
Credit
29,000,000
Notes payable
29,000,000
(2) Prepare the journal entry for the first installment payment on November 30, 2011. (Enter your
answers in dollars not in millions. Round "PV Factor" to 5 decimal places and final answers to
the nearest dollar amount. Omit the "$" sign in your response.)
Date
Nov. 30 2011
General Journal
Debit
Interest expense
290,000
Note payable
2,286,61
Cash
Credit
2,576,615 1
(3) What is the amount of interest expense that LCD will report in its income statement for the year ended
December 31, 2011?. (Enter your answers in dollars not in millions. Round your answer to the
nearest dollar amount. Omit the "$" sign in your response.)
Interest expense
$
557,134 1
Explanation:
(2)
11.25508
amount
(from Table 4)
of loan
n = 12, i = 1%
$2,576,615
installment
payment
(3)
November (1%
$29,000,000)
December (1%
[$29,000,000
2,286,615])
290,000
267,134
557,134
Debit
Credit
Gless (Issuer)
Cash
20,600,000
20,000,0
600,000
Century (Investor)
Investment in convertible bonds
2,400,00
72,000
Cash
2,472,000 1
(2) Prepare the journal entries for the June 30, 2015, interest payment by both Gless and Century
assuming both use the straight-line method. (Enter your answers in dollars not in millions. Do not
round intermediate calculations. Round your answers to the nearest dollar amount. Omit the
"$" sign in your response.)
General Journal
Debit
Credit
Gless (Issuer)
Interest expense
1,060,00
30,000
Cash
1,090,000
Century (Investor)
Cash
130,800 1
3,600
Interest revenue
127,200
(3) On July 1, 2016, when Glesss common stock had a market price of $33 per share, Century converted
the bonds it held. Prepare the journal entries by both Gless and Century for the conversion of the
bonds (book value method). (Enter your answers in dollars not in millions. Do not round
intermediate calculations. Round your answers to the nearest dollar amount. Omit the "$" sign
in your response.)
General Journal
Debit
Credit
Gless (Issuer)
Convertible bonds payable
2,400,00
32,400
Common stock
2,432,400 1
Century (Investor)
Investment in common stock
2,432,400 1
2,400,00
32,400
rev: 04-27-2011
Explanation:
(1)
Gless (Issuer)
Gless (Issuer)
Interest expense ($1,090,000 30,000) = 1,060,000
Premium on bonds payable ($600,000 20) = 30,000
Cash (5.45% $20,000,000) = 1,090,000
Century (Investor)
Cash (5.45% $2,400,000) = 130,800
Premium on bond investment ($72,000 20) = 3,600
Interest revenue ($130,800 3,600) = 127,200
[Using the straight-line method, each interest entry is the same.]
(3)
Gless (Issuer)
Convertible bonds payable (12% of the account balance) = 2,400,000
Premium on bonds payable (($600,000 [$30,000 11]) 12%) = 32,400
Common stock (to balance)= 2,432,400
Century (Investor)
Investment in common stock = 2,432,400
Investment in convertible bonds (account balance) = 2,400,000
Premium on bond investment ($72,000 [$3,600 11]) = 32,400
General Journal
Interest expense
Discount on bonds payable
Debit
Credit
38,808,174 0.01%
603,174
Cash
Dec 31,
2011
38,205,0
Interest expense
38,838,333 0.01%
633,333
Cash
38,205,0
53,399,990 0.01%
53,399,990 0.01%
(2) Assume the fair value of the bonds on December 31, 2012, had risen to $734 million. Prepare the
journal entry to adjust the bonds to their fair value for presentation in the December 31, 2012, balance
sheet. (Enter your answers in dollars not in millions. Round "PV Factor" to 5 decimal places
and final answers to the nearest whole dollar amount. Omit the "$" sign in your response.)
Date
June 30,
2012
Dec 31,
2012
General Journal
Interest expense
Debit
Credit
38,870,000 0.01%
665,000
Cash
38,205,0
Interest expense
38,903,250 0.01%
698,250
Cash
38,205,0
8,636,750 0.01%
8,636,750 0.01%
Explanation:
(1)
At January 1, 2011, the book value of the bonds was the initial issue price, $776,163,483. The liability,
though, was increased when Federal recorded interest during 2011:
June 30, 2011
Interest expense (5% $776,163,483) = 38,808,174
Cash (4.5% $849,000,000) = 38,205,000
776,163,483
1,236,507
777,399,990
Comparing the amortized initial amount at December 31, 2011, with the fair value on that date provides
the Fair value adjustment balance needed:
December 31, 2011, book value
(amortized initial amount)
December 31, 2011, fair value
Fair value adjustment balance
needed: debit/(credit)
777,399,990
724,000,000
53,399,990
Federal would record the $53,399,990 as a gain in the 2011 income statement:
Note: A decrease in the value of an asset is a loss; a decrease in the value of a liability is a gain.
In the balance sheet, the bonds are reported among long-term liabilities at their $724,000,000 fair value:
Bonds payable
Less: Discount on bonds payable
December 31, 2011, book value
(amortized initial amount)
Less: Fair value adjustment
December 31, 2011, fair value
$ 849,000,000
(71,600,010)
$ 777,399,990
(53,399,990)
$ 724,000,000
(2)
If the fair value at December 31, 2012, is $734,000,000 a year later, Federal needs to compare that
amount with the amortized initial measurement on that date. That amount was increased when Federal
recorded interest during 2012:
777,399,990
1,363,250
778,763,240
Comparing the amortized initial amount at December 31, 2012, with the fair value on that date provides
the Fair value adjustment balance needed:
December 31, 2012, book value (amortized
initial amount)
December 31, 2012, fair value
Fair value adjustment balance needed: debit/
(credit)
Less: Fair value adjustment debit/(credit),
balance 1/1/2012
Change in fair value adjustment, 12/31/2012
$ 778,763,240
(734,000,000)
$
44,763,240
53,399,990
(8,636,750)
$ 849,000,000
(70,236,760)
$ 778,763,240
(44,763,240)
$ 734,000,000