E14.1 (LO1) (Classification of Liabilities) Presented below are various account balances.
Instructions
Indicate whether each of the items above should be classified on December 31, 2019, as a current liability, a non-current liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.
EXERCISE 14.1 (15–20 minutes)
Alternative answer provided by one of your classmates:
“The product requires aging for 5 years before sale”. In other word, the operating cycle for winery industry is 5 years. Therefore, the bank loans should be classified current liability.
(b) Current liability, €250,000; non-current liability, €750,000.
(c) Current liability.
(d) Probably non-current, although if operating cycle is greater than one year and current assets are used, this item would be classified as current.
(e) Current liability.
(f) Current liability.
(g) Current liability.
(h) Current liability.
E14.4 (LO1) (Entries for Bond Transactions) Foreman Cleaners issued €800,000 of 10%, 20-year bonds on January 1, 2019, at 119.792 to yield 8%. Interest is payable semiannually on July 1 and January 1.
Instructions
Prepare the journal entries to record the following.
EXERCISE 14.4 (15–20 minutes)
(a) |
1/1/19 |
Cash (€800,000 X 1.19792) |
958,336 |
|
Bonds Payable |
958,336 |
|||
(b) |
7/1/19 |
Interest Expense |
||
(€958,336 X 8% X 6/12) |
38,333 |
|||
Bonds Payable |
1,667 |
|||
Cash (€800,000 X 10% X 6/12) |
40,000 |
|||
(c) |
12/31/19 |
Interest Expense |
||
(€958,336 – €1,667) X 8% X 6/12 |
38,267 |
|||
Bonds Payable |
1,733 |
|||
Interest Payable |
40,000 |
E14.5 (LO1) (Entries for Bond Transactions) Assume the same information as in E14.4, except that the bonds were issued at 84.95 to yield 12%.
Instructions
Prepare the journal entries to record the following. (Round to the nearest euro.)
EXERCISE 14.5 (15–20 minutes)
(a) |
1/1/19 |
Cash (€800,000 X .8495) |
679,600 |
||
Bonds Payable |
679,600 |
||||
(b) |
7/1/19 |
Interest Expense |
|||
(€679,600 X 12% X 1/2) |
40,776 |
||||
Bonds Payable |
776 |
||||
Cash (€800,000 X 10% X 6/12) |
40,000 |
||||
(c) |
12/31/19 |
Interest Expense |
|||
[(€679,600 + €776) X 12% X 1/2] |
40,823 |
||||
Bonds Payable |
823 |
||||
Interest Payable |
40,000 |
E14.8 (LO1) (Entries and Questions for Bond Transactions) On June 30, 2018, Macias SA issued R$5,000,000 face value of 13%, 20-year bonds at R$5,376,150 to yield 12%. The bonds pay semiannual interest on June 30 and December 31.
Instructions
EXERCISE 14.8 (20–30 minutes)
(a) |
(1) |
June 30, 2018 |
||||
Cash |
5,376,150 |
|||||
Bonds Payable |
5,376,150 |
|||||
(2) |
December 31, 2018 |
|||||
Interest Expense |
||||||
(R$5,376,150 X 12% X 6/12) |
322,569 |
|||||
Bonds Payable |
2,431 |
|||||
Cash |
||||||
(R$5,000,000 X 13% X 6/12) |
325,000 |
|||||
(3) |
June 30, 2019 |
|||||
Interest Expense |
||||||
[(R$5,376,150 – R$2,431) |
||||||
X 12% X 6/12] |
322,423 |
|||||
Bonds Payable |
2,577 |
|||||
Cash |
325,000 |
|||||
(4) |
December 31, 2019 |
|||||
Interest Expense |
||||||
[(R$5,376,150 – R$2,431 – |
||||||
R$2,577) X 12% X 6/12] |
322,269 |
|||||
Bonds Payable |
2,731 |
|||||
Cash |
325,000 |
|||||
(b) |
Non-current Liabilities: |
|||||
Bonds payable, 13% (due on June 30, 2038) |
R$5,368,411* |
|||||
*R$5,376,150 – (R$2,431 + R$2,577 + R$2,731) = R$5,368,411 |
(c) |
(1) |
Interest expense for the period from |
||
January 1 to June 30, 2019 from (a) 3. |
R$ 322,423 |
|||
Interest expense for the period from |
||||
July 1 to December 31, 2019 from (a) 4. |
322,269 |
|||
Amount of bond interest expense |
||||
reported for 2019 |
R$ 644,692 |
(2) |
Total interest to be paid for the bond |
|||
(R$5,000,000 X 13% X 20) |
R$13,000,000 |
|||
Less: Premium (R$5,376,150 – R$5,000,000) |
376,150 |
|||
Total cost of borrowing over the life |
||||
of the bond |
R$12,623,850 |
E14.13 (LO2) (Imputation of Interest with Right) On January 1, 2019, Durdil A.Ş. borrowed and received 500,000 from a major customer evidenced by a zero-interest-bearing note due in 3 years. As consideration for the zero-interest-bearing feature, Durdil agrees to supply the customer's inventory needs for the loan period at lower than the market price. The appropriate rate at which to impute interest is 8%.
Instructions
EXERCISE 14.13 (15–20 minutes)
(a) |
Cash |
500,000 |
|
Notes Payable |
396,915 |
||
Unearned Sales Revenue |
|||
(₺500,000 – ₺396,915) |
103,085 |
Face value of note |
₺500,000 |
|
Present value of 1 at 8% |
|
|
Present value of note |
₺396,915 |
December 31, 2019 |
|||
(b) |
Interest Expense (₺396,915 X 8%) |
31,753 |
|
Notes Payable |
31,753 |
||
Unearned Sales Revenue (₺103,085 ÷ 3) |
34,362 |
||
Sales Revenue |
34,362 |
P14.3 (LO1) (Negative Amortization) Good-Deal Auto 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 promotion will bring in some new buyers.
On January 1, 2019, a customer purchased a new €33,000 automobile, making a down payment of €1,000. The customer signed a note indicating that the annual rate of interest would be 8% and that quarterly payments would be made over 3 years. For the first year, Good-Deal required a €400 quarterly payment to be made on April 1, July 1, October 1, and January 1, 2020. After this one-year period, the customer was required to make regular quarterly payments that would pay off the loan as of January 1, 2022.
Instructions
PROBLEM 14.3 |
(a)
|
(1) |
(2) @2% |
(1) – (1) Change in |
Carrying Amount of Note |
||||
1/1/19 |
— |
— |
— |
€32,000 |
||||
4/1/19 |
€400 |
€640 |
€240 |
32,240 |
||||
7/1/19 |
400 |
645 |
245 |
32,485 |
||||
10/1/19 |
400 |
650 |
250 |
32,735 |
||||
1/1/20 |
400 |
655 |
255 |
32,990 |
(b) At this point, we see that the customer owes €32,990, or €990 more than at the beginning of the year.
(c) To earn 8% over the next two years the quarterly payments must be €4,503 computed as follows:
€32,990 ÷ 7.32548 (PVOA8, 2%) (from Table 6-4) = €4,503
(d)
|
|
|
Change in |
Carrying Amount of Note |
||||
1/1/20 |
— |
— |
— |
€32,990 |
||||
4/1/20 |
€4,503 |
€660 |
€3,843 |
29,147 |
||||
7/1/20 |
4,503 |
583 |
3,920 |
25,227 |
||||
10/1/20 |
4,503 |
505 |
3,998 |
21,229 |
||||
1/1/21 |
4,503 |
425 |
4,078 |
17,151 |
||||
4/1/21 |
4,503 |
343 |
4,160 |
12,991 |
||||
7/1/21 |
4,503 |
260 |
4,243 |
8,748 |
||||
10/1/21 |
4,503 |
175 |
4,328 |
4,420 |
||||
1/1/22 |
4,503 |
83* |
4,420 |
0 |
*rounded €5
(e) The new sales gimmick may bring people into the showroom the first time but will drive them away once they learn of the amount of their year 2 and year 3 payments. Many will not have budgeted for these increases, and will be facing a financial challenge because they owe more on their car than its worth. One should question the ethics of a dealer using this tactic.
P14.6 (LO2) (Entries for Zero-Interest-Bearing Note; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2018, 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.
Instructions
Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates.
PROBLEM 14.6 |
(a) |
December 31, 2018 |
|||
Machinery |
182,485.20* |
|||
Cash |
50,000.00 |
|||
Notes Payable |
132,485.20 |
|||
*To record machinery at the |
||||
present value of the note plus |
||||
the immediate cash payment: |
||||
PV of $40,000 annuity @ 8% |
||||
for 4 years ($40,000 X 3.31213) |
$132,485.20 |
|||
Down payment |
50,000.00 |
|||
Capitalized value of machinery |
$182,485.20 |
(b) |
December 31, 2019 |
||
Notes Payable |
40,000.00 |
||
Cash |
40,000.00 |
||
Interest Expense |
10,598.82 |
||
Notes Payable |
10,598.82 |
Schedule of Note Discount Amortization |
||||||||
|
(1) |
(2) Interest Expense @8% |
(1) – (2) Amortization |
Carrying Amount of Note |
||||
12/31/18 |
— |
— |
— |
$132,485.20 |
||||
12/31/19 |
$40,000.00 |
$10,598.82 |
$29,401.18 |
103,084.02* |
||||
12/31/20 |
40,000.00 |
8,246.72 |
31,753.28 |
71,330.74 |
||||
12/31/21 |
40,000.00 |
5,706.46 |
34,293.54 |
37,037.20 |
||||
12/31/22 |
40,000.00 |
2,962.80** |
37,037.20 |
— |
*$103,084.02 = $132,485.20 – $29,401.18.
**$0.18 adjustment due to rounding.
PROBLEM 14.6 (Continued)
(c) |
December 31, 2020 |
||
Notes Payable |
40,000.00 |
||
Cash |
40,000.00 |
||
Interest Expense |
8,246.72 |
||
Notes Payable |
8,246.72 |
||
(d) |
December 31, 2021 |
||
Notes Payable |
40,000.00 |
||
Cash |
40,000.00 |
||
Interest Expense |
5,706.46 |
||
Notes Payable |
5,706.46 |
||
(e) |
December 31, 2022 |
||
Notes Payable |
40,000.00 |
||
Cash |
40,000.00 |
||
Interest Expense |
2,962.80 |
||
Notes Payable |
2,962.80 |
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