Exercise 10-4A on page 567 A partial amortization schedule for a 10-year note pa
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Exercise 10-4A on page 567
A partial amortization schedule for a 10-year note payable issued on January 1, 2016, is shown below.
Acct. Period Principle Jan 1 Cash Payment Applied Interest Applied Principle
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
a. Using the financial statement model below, record the appropriate amounts for the following two events:
1. January 1, 2016, issue of note payable
2. December 31, 2016, payment on the note payable.
Exercise 10-5A on page 567
Singer Company has a line of credit with United Bank. Singer can borrow up to $400,000 at any time to over the course of 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% 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 applied to the outstanding monthly balance. For example, Singer pays 6.5% (4.5% + 2%) annual interest on $140,000 for the month of February.
Month Amount Borrowed/(Repaid) Prime Rate for the Month
January $80,000 4.0%
February 60,000 4.5
March (20,000) 4.0
Provide all journal entries pertaining to Singer’s line of credit for the first three months of 2016.
Exercise 10-25A on page 572
Composite Solutions Company (CSC) has the following account balances:
Current Assets $150,000 Current Liabilities $100,000
Noncurrent assets 350,000 Noncurrent Liabilities 250,000
Stockholder’s 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 the decision process, CSC’s management wants to determine the effects of each alternative on its current ratio and debt to assets ratio.
Help CSC’s management company by completing the following chart
Ratio Currently If bonds are issued If stock is issued
Current ratio:
Debt to asset ratio:
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% tax rate, determine the amount of the increase in retained earnings that would result under each financing option.
Exercise 10-19A on page 571
On January 1, 2016, the Diamond Association issued bonds with a face value of $300,000, a stated rate of interest of 6%, 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% 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.
Determine the amount of the discount on the day of issue.
Determine the amount of interest expense recognized on December 31, 2016.
Determine the carrying value of the bond liability on December 31, 2016.
Provide the general journal entry necessary to record the December 31, 2016, interest expense.
Exercise 10-20A on page 571
On January 1, 2016, Parker Company issued bonds with a face value of $80,000, a stated rate of interest of 8%, and a 5-year term to maturity. Interest is payable cash on December 31 of each year. The effective rate of interest was 9% 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.
Prepare an amortization table
What items in the table would appear on the 2019 balance sheet?
What items in the table would appear on the 2019 income statement?
What items in the table would appear on the 2019 statement of cash flows?
Explanation / Answer
1)
1jan16 Accounts payable Debit $ 200,000
note payable credit $ 200,000
31dec 16 Note payeble debit 15,174
Interest payable debit 12,000
cash credit 27,174
[being amount paid on note payable]
2)jan Checking debit 80,000
Line of credit credit 80,000
[Transfer of balance from checking to line of credit account]
31 jan Interest expense debit 400 [80000*(4%+2%)*1/12
cash credit 400
1feb Checking debit 60,000
line of credit credit 60,000
28 feb Interest expense debit 758.33 [140000*6.5%*1/12]
cash credit 758.33
[being interst for month of feb on line of credit outstanding is paid]
1 march Line of credit debit 20,000
checking credit 20 ,000
31 march interest expense debit 600 [120000*6%*1/12]
cash credit 600
3)
(150000+80000 for cash)/100000
= 2.30
(150000+80000)/100000
= 2.30
(100000+250000)/(150000+350000)
350000/500000
= .70
(350000+80000 for bond payable)/(500000+80000 for cash)
430000/580000
.74
350000/(500000+80000)
350000/580000
=.60
b)
4)1 amount od discount on date of issue =21068 =[300000-278932]
B Amount of interest expense = 278932*.07 = $ 19,525.24
c) carrying value of bond liability = 300000 - 19542.76**= 280457.24
**Amount od discount = 21068 less discount amortised = [19525.24 - (300000*6%)]
21068 -1525.24 = 19542.76
d)Interest expense debit 19525.24
Discount on bond payable credit 1525.24
Cash credit 18000
[being interest is recorded]
5)
a)items showing balance sheet in 2019 :
unamortised Discount on bond payable =734.34 (asset)
Bond payable =80000 (liability)
b)In income statement :
Discount amortised 673.31(income side)
Interest expense 7073.31 (expense side)
c)cash flow statement:
Interest payable/paid = 6400
Ratio formula Icurrently if bonds are issued If stock is issued current ratio current asset / current liability 150000/100000=1.5(150000+80000 for cash)/100000
= 2.30
(150000+80000)/100000
= 2.30
debt asset ratio total liabilities/total asset(100000+250000)/(150000+350000)
350000/500000
= .70
(350000+80000 for bond payable)/(500000+80000 for cash)
430000/580000
.74
350000/(500000+80000)
350000/580000
=.60
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