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BA 220 Week 7 Homework Grantham

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BA 220 Week 7 Homework Grantham

Exercise 9-8 A – Current Liabilities

Current Liabilities

The following transactions apply to Ozark Sales or 2016.

1. The business wa started when the company received $50,000.00 from the issue of common stock.

2. Purchased equipment invemtory of $380,000.00 on account.

3. Sold equpment for $510,000.00 cash(not inculding sales tax). Sales tax of 8 percent is collected when the merchandise is sold. The merchandise has a cost of $330,000.00.

4. Provided a six-month warrenty on the equipment sold. Based on industry estimates, the warrenty claims would amount to 2 percent of sales.

5. Paid the sales tax to the state agency of $400,000.00 of the sales.

6. On September 1, 2016, borrowed $50,000.00 from the local bank. The note had a 4 percent interest rate and mature on March 1, 2017.

7. Paid $6200.00 for warrenty repairs during the year.

8. Paid operating expenses of $78,000.00 for the year.

9. Paid $250,000.00 of accounts payable.

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

Required:

a. Show the effect of these transactions of the financial statements using a horizontal statements model like the one shown. Use + for increase and - for decrease, and NA for not affected. In the Cash Flow column, indicate whether the item is an operating activity(OA), inveting activity(IA), or financing activity(FA). The first transaction is recorded as an example.

Assets

=

Liabilities

+

Equity

 

Revenue

-

Expense

=

Net Income

 

Cash Flow

 

+

 

NA

 

+

 

NA

 

NA

 

NA

 

+ FA

 

b. Prepare the journal entries for the above transactions and post them to the appropiate T-accounts.

c. Prepare the income statements, 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

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 Phillip have been employed all year.

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 parties? Why or why not?

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

EXERCISE 10-6A

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 to 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.

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 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.

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

EXERCISE 10-8A

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.

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 on interest are not required.

EXERCISE 10-4A

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

Accounting             Principal                   Cash              Applied to                 Applied to

    Period                   Bal 1/1                 Payment              Interest                 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

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.

b. If the company earned $62,000 cash revenue and paid $45,000

            (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

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

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

 

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.

 

a. 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:

                                       

                                       

                                       

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% 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.

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

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

  1. What items in the table would appear on the 2019 balance sheet?
  2. What items in the table would appear on the 2019 income statement?
  3. What items in the table would appear on the 2019 statement of cash flows?

 


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