Financial Accounting W7 Assignment “Week 7 Problem Sets”

Financial Accounting

W7 Assignment “Week 7 Problem Sets”

Week 7 Problem Sets

•Exercise 9-8A on page. 513

Exercise 9-8A Current liabilities

The following transactions apply to Ozark Sales for 2016:

1. The business was started when the company received $50,000 from the issue of common

stock.

2. Purchased equipment inventory of $380,000 on account.

3. Sold equipment for $510,000 cash (not including sales tax). Sales tax of 8 percent is collected

when the merchandise is sold. The merchandise had a cost of $330,000.

4. Provided a six-month warranty on the equipment sold. Based on industry estimates, the

warranty claims would amount to 2 percent of sales.

5. Paid the sales tax to the state agency on $400,000 of the sales.

6. On September 1, 2016, borrowed $50,000 from the local bank. The note had a 4 percent

interest rate and matured on March 1, 2017.

7. Paid $6,200 for warranty repairs during the year.

8. Paid operating expenses of $78,000 for the year.

9. Paid $250,000 of accounts payable.

10. Recorded accrued interest on the note issued in transaction no. 6.

Required

a. Show the effect of these transactions on the financial statements using a horizontal statements

model like the one shown here. Use 1 for increase, 2 for decrease, and NA for not affected. In

the Cash Flow column, indicate whether the item is an operating activity (OA), investing

activity (IA), or financing activity (FA). The first transaction is recorded as an example.

Assets 5 Liabilities 1 Equity Rev. 2 Exp. 5 Net Inc. Cash Flow

1 NA 1 NA NA NA 1 FA

b. Prepare the journal entries for the above transactions and post them to the appropriate

T-accounts.

c. Prepare the income statement, balance sheet, and statement of cash flows for 2016.

d. What is the total amount of current liabilities at December 31, 2016?

 

•Exercise 9-10A on page. 514

Exercise 9-10A Calculating payroll

Old Town Entertainment has two employees in 2016. Clay earns $3,600 per month and

Philip, the manager, earns $10,800 per month. Neither is paid extra for working overtime.

Assume the Social Security tax rate is 6 percent on the first $110,000 of earnings and the

Medicare tax rate is 1.5 percent on all earnings. The federal income tax withholding is 15 percent of gross earnings for Clay and 20 percent for Philip. Both Clay and Philip have been employed all year.

Required

a. Calculate the net pay for both Clay and Philip for March.

b. Calculate the net pay for both Clay and Philip for December.

c. Is the net pay the same in March and December for both employees? Why or why not?

d. What amounts will Old Town report on the 2016 W-2s for each employee?

 

•Exercises 10-6A on page 568

Exercise 10-6A Two accounting cycles for bonds issued at face value

Doyle Company issued $500,000 of 10-year, 7 percent bonds on January 1, 2016. The bonds

were issued at face value. Interest is payable in cash on December 31 of each year. Doyle immediately invested the proceeds from the bond issue in land. The land was leased for an annual

$125,000 of cash revenue, which was collected on December 31 of each year, beginning December 31, 2016.

Required:

a. Prepare the journal entries for these events, and post them to T-accounts for 2016 and

2017.

b. Prepare the income statement, balance sheet, and statement of cash flows for 2016 and

2017.

 

•Exercise 10-7A on page 568

Exercise 10-7A Two accounting cycles for bonds issued at face value

On January 1, 2016, Bell Corp. issued $180,000 of 10-year, 6 percent bonds at their face

amount. Interest is payable on December 31 of each year with the first payment due December 31, 2016.

Required

Prepare all the general journal entries related to these bonds for 2016 and 2017.

 

•Exercise 10-8A on page 568

Exercise 10-8A Journal entries for callable bonds

Nivan Co. issued $500,000 of 5 percent, 10-year, callable bonds on January 1, 2016, at their face

value. The call premium was 3 percent (bonds are callable at 103). Interest was payable annually

on December 31. The bonds were called on December 31, 2020.

Required

Prepare the journal entries to record the bond issue on January 1, 2016, and the bond redemption on December 31, 2020. Entries for accrual and payment of interest are not required.

 

•Exercise 10-4A on page 567

Exercise 10- 4A Financial statement effects of an installment note

A partial amortization schedule for a 10-year note payable issued on January 1, 2016, is shown below:

Accounting

Period

Principal

Balance January 1

Cash

Payment

Applied to

Interest

Applied to

Principal

2016 $200,000 $27,174 $12,000 $15,174

2017 184,826 27,174 11,090 16,084

2018 168,742 27,174 10,125 17,049

Required

a. Using a financial statements model like the one shown here, record the appropriate amounts

for the following two events:

(1) January 1, 2016, issue of the note payable.

(2) December 31, 2016, payment on the note payable.

Event

No. Assets 5 Liab. 1 Equity Rev. 2 Exp. 5 Net Inc. Cash Flow

b. If the company earned $62,000 cash revenue and paid $45,000 in cash expenses in addition to

the interest in 2016, what is the amount of each of the following?

(1) Net income for 2016.

(2) Cash flow from operating activities for 2016.

(3) Cash flow from financing activities for 2016.

c. What is the amount of interest expense on this loan for 2019?

 

•Exercise 10-5A on page 567

Exercise 10-5A Journal entries for a line of credit

Singer Company has a line of credit with United Bank. Singer can borrow up to $400,000 at any

time over the course of the 2016 calendar year. The following table shows the prime rate expressed as an annual percentage along with the amounts borrowed and repaid during the first

three months of 2016. Singer agreed to pay interest at an annual rate equal to 2 percent above the

bank’s prime rate. Funds are borrowed or repaid on the first day of each month. Interest is payable in cash on the last day of the month. The interest rate is applied to the outstanding monthly

balance. For example, Singer pays 6.5 (4.5 percent 1 2 percent) annual interest on

$140,000 for the month of February.

Month

Amount Borrowed

or (Repaid)

Prime Rate for

the Month

January $80,000 4.0%

February 60,000 4.5

March (20,000) 4.0

Required

Provide all journal entries pertaining to Singer’s line of credit for the first three months

of 2016.

 

•Exercise 10-25A on page 572

Exercise 10-25A Determining the effects of financing alternatives on ratios

Composite Solutions Company (CSC) has the following account balances:

Current assets $150,000

Noncurrent assets 350,000

Current liabilities $100,000

Noncurrent liabilities 250,000

Stockholders’ equity 150,000

The company wishes to raise $80,000 in cash and is considering two financing options: CSC can

sell $80,000 of bonds payable, or it can issue additional common stock for $80,000. To help in

the decision process, CSC’s management wants to determine the effects of each alternative on its

current ratio and debt to assets ratio.

Required

a. Help CSC’s management by completing the following chart:

Ratio Currently If Bonds Are Issued If Stock Is Issued

Current ratio

Debt to asset ratio

b. Assume that after the funds are invested, EBIT amounts to $60,000. Also assume the

company pays $6,000 in dividends or $6,000 in interest depending on which source of

financing is used. Based on a 40 percent tax rate, determine the amount of the increase in

retained earnings that would result under each financing option.

 

•Exercise 10-19A on page 571

Exercise 10-19A Effective interest amortization of a bond discount

On January 1, 2016, the Diamond Association issued bonds with a face value of $300,000, a

stated rate of interest of 6 percent, and a 10-year term to maturity. Interest is payable in cash on

December 31 of each year. The effective rate of interest was 7 percent at the time the bonds were

issued. The bonds sold for $278,932. Diamond used the effective interest rate method to amortize the bond discount.

Required

a. Determine the amount of the discount on the day of issue.

b. Determine the amount of interest expense recognized on December 31, 2016.

c. Determine the carrying value of the bond liability on December 31, 2016.

d. Provide the general journal entry necessary to record the December 31, 2016, interest

expense.

 

•Exercise 10-20A on page 571

Exercise 10-20A Effective interest amortization of a bond discount

On January 1, 2016, Parker Company issued bonds with a face value of $80,000, a stated rate of

interest of 8 percent, and a five-year term to maturity. Interest is payable in cash on December 31 of

each year. The effective rate of interest was 9 percent at the time the bonds were issued. The bonds

sold for $76,888. Parker used the effective interest rate method to amortize the bond discount.

Required

a. Prepare an amortization table as shown below:

Cash

Payment

Interest

Expense

Discount

Amortization

Carrying

Value

January 1, 2016 76,888

December 31, 2016 6,400 6,920 520 77,408

December 31, 2017 ? ? ? ?

December 31, 2018 ? ? ? ?

December 31, 2019 ? ? ? ?

December 31, 2020 ? ? ? ?

Totals 32,000 35,112 3,112

b. What item(s) in the table would appear on the 2019 balance sheet?

c. What item(s) in the table would appear on the 2019 income statement?

d. What item(s) in the table would appear on the 2019 statement of cash flows?