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BE11-1 Cardinal Company has the following obligations at December 31: (a) a note

payable for $100,000 due in 2 years, (b) a 10-year mortgage payable of $300,000 payable
in ten $30,000 annual payments, (c) interest payable of $15,000 on the mortgage, and (d)
accounts payable of $60,000. For each obligation, indicate whether it should be classified
as a current liability.(Assume an operating cycle of less than one year.)
(a)
A note payable due in two years is a long-term liability, not a current
liability.
(b)
$30,000 of the mortgage payable is a current maturity of long-term debt.
This amount should be reported as a current liability.
(c)
Interest payable is a current liability because it will be paid out of current
assets in the near future.
(d)
Accounts payable is a current liability because it will be paid out of current
assets in the near future.
E11-1 On June 1, Padillio Company borrows $70,000 from First Bank on a 6-month,
$70,000, 12% note.
Instructions
(a) Prepare the entry on June 1.
(b) Prepare the adjusting entry on June 30.
(c) Prepare the entry at maturity (December 1), assuming monthly adjusting entries have
been made through November 30.
(d) What was the total financing cost (interest expense)?
Instructions
Prepare the entry to record the sales transactions and related taxes for each client.
(a) June 1

Cash..................................................................70,000
Notes Payable.......................................................

70,000
(b) June 30

Interest Expense............................................................
Interest Payable...................................................

700

700
[($70,000 X 12%) X 1/12]
(c)

Dec. 1

Notes Payable................................................................
Interest Payable............................................................
($70,000 X 12% X 6/12)

70,000
4,200

Cash......................................................................
74,200
(d)

$4,200

E11-3 Nevin Company publishes a monthly sports magazine, Fishing


Preview. Subscriptions to the magazine cost $20 per year. During
November 2006, Nevin sells 9,000 subscriptions beginning with the
December issue. Nevin prepares financial statements quarterly and
recognizes subscription revenue earned at the end of the quarter.The
company uses the accounts Unearned Subscriptions and Subscription
Revenue.
Instructions

(a) Prepare the entry in November for the receipt of the subscriptions.
(b) Prepare the adjusting entry at December 31, 2006, to record
subscription revenue earned in December 2006.
(c) Prepare the adjusting entry at March 31, 2007, to record
subscription revenue earned in the first quarter of 2007.
(a)

Nov.

30

Cash ...................................................................180,000
Unearned Subscriptions......................................

180,000
(9,000 X $20)
(b)

Dec.

31

Unearned Subscriptions................................................
Subscription Revenue..........................................

15,000

15,000
($180,000 X 1/12)
(c)

Mar. 31

Unearned Subscriptions.................................................
Subscription Revenue...........................................

45,000

45,000
($180,000 X 3/12)

P11-1A On January 1, 2006, the ledger of Shumway Software Company contains the
following liability accounts.
Accounts Payable $42,500
Sales Taxes Payable 5,800
Unearned Service Revenue 15,000
During January the following selected transactions occurred.
Jan. 1 Borrowed $15,000 in cash from Amsterdam Bank on a 4-month, 8%, $15,000 note.

5 Sold merchandise for cash totaling $10,400, which includes 4% sales taxes.
12 Provided services for customers who had made advance payments of $9,000. (Credit
Service Revenue.)
14 Paid state treasurer's department for sales taxes collected in December 2005, $5,800.
20 Sold 700 units of a new product on credit at $52 per unit, plus 4% sales tax.
25 Sold merchandise for cash totaling $12,480, which includes 4% sales taxes.
Instructions
(a) Journalize the January transactions.
(b) Journalize the adjusting entry at January 31 for the outstanding notes payable.
(c) Prepare the current liabilities section of the balance sheet at January 31, 2006. Assume
no change in accounts payable.
Please see the attached excel sheet
*P11-6A On July 1, 2006, Kingston Satellites issued $3,600,000 face value, 9%, 10-year
bonds at $3,375,680. This price resulted in an effective-interest rate of 10% on the bonds.
Kingston uses the effective-interest method to amortize bond premium or discount. The
bonds pay semiannual interest July 1 and January 1.
Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entry to record the issuance of the bonds on July 1, 2006.
(b) Prepare the journal entry to record the accrual of interest and the amortization of the
discount on December 31, 2006.
(c) Prepare the journal entry to record the payment of interest and the amortization of the
discount on July 1, 2007, assuming that interest was not accrued on June 30.
(d) Prepare the journal entry to record the accrual of interest and the amortization of the
discount on December 31, 2007.
(e) Prepare an amortization table through December 31, 2007 (3 interest periods) for this
bond issue.
(a)
July

2006
Cash ...................................................3,375,680
Discount on Bonds Payable..............................
Bonds Payable..........................................

224,320

3,600,000
(b)

Dec.

31

Bond Interest Expense......................................


($3,375,680 X 5%)
Discount on Bonds Payable....................

6,784
Bond Interest Payable.............................
162,000

168,784

($3,600,000 X 9% X 1/2)
(c)
July

2007
Bond Interest Expense......................................
[($3,375,680 + $6,784) X 5%]
Discount on Bonds Payable....................

169,123

7,123
Cash..........................................................
162,000
(d)

Dec.

31

Bond Interest Expense......................................


[($3,382,464 + $7,123) X 5%]
Discount on Bonds Payable....................

169,479

7,479
Bond Interest Payable.............................
162,000
(e)

KINGSTON SATELLITES
Bond Discount Amortization
Effective-Interest MethodSemiannual Interest Payments
9% Bonds Issued at 10%
(A)
Semiannual
Interest
Periods
Issue date
1
2
3

Interest
to Be
Paid
$162,000
162,000
162,000

(B)
Interest
Expense
to Be
Recorded
$168,784
169,123
169,479

(C)
Discount
Amortization
(B) (A)

(D)
Unamortized
Discount
(D) (C)

(E)
Bond
Carrying
Value
($3,600,000 D)

$6,784
7,123
7,479

$224,320
217,536
210,413
202,934

$3,375,680
3,382,464
3,389,587
3,397,066

*P11-7A On July 1, 2006, S. Strigel Chemical Company issued $5,000,000 face value,
10%, 10-year bonds at $5,679,533. This price resulted in an 8% effective-interest rate on
the bonds.
Strigel uses the effective-interest method to amortize bond premium or discount. The
bonds pay semiannual interest on each July 1 and January 1.

Instructions
(Round all computations to the nearest dollar.)
(a) Prepare the journal entries to record the following transactions.
(1) The issuance of the bonds on July 1, 2006.
(2) The accrual of interest and the amortization of the premium on December 31, 2006.
(3) The payment of interest and the amortization of the premium on July 1, 2007,
assuming no accrual of interest on June 30.
(4) The accrual of interest and the amortization of the premium on December 31, 2007.
(b) Show the proper balance sheet presentation for the liability for bonds payable on the
December 31, 2007, balance sheet.
(c) Provide the answers to the following questions in letter form.
(1) What amount of interest expense is reported for 2007?
(2) Would the bond interest expense reported in 2007 be the same as, greater than, or less
than the amount that would be reported if the straight-line method of amortization were
used?
(3) Determine the total cost of borrowing over the life of the bond.
(4) Would the total bond interest expense be greater than, the same as, or less than the
total interest expense if the straight-line method of amortization were used?

P11-7A)
(a)

(1)
July

2006
Cash .........................................5,679,533
Bonds Payable................................

5,000,000
Premium on Bonds
Payable.......................................
679,533
(2)

Dec.

31

Bond Interest Expense............................


($5,679,533 X 4%)
Premium on Bonds
Payable.................................................
Bond Interest Payable...................

227,181

22,819

250,000
($5,000,000 X 5%)
(3)
July

2007
Bond Interest Expense............................
[($5,679,533 $22,819) X 4%]
Premium on Bonds

226,269

Payable...................................................
Cash................................................

23,731

Bond Interest Expense............................


[($5,656,714 $23,731) X 4%]
Premium on Bonds
Payable...................................................
Bond Interest Payable...................

225,319

250,000
(4)

Dec.

31

24,681

250,000

(b)

Bonds payable..................................................................
Add: Premium on bonds payable..................................
5,608,302
*($679,533 $22,819 $23,731 $24,681)

5,000,000*
608,302*

(c)

Dear

Thank you for asking me to clarify some points about the bonds issued by
Strigel Chemical Company.
(1)

The amount of interest expense reported for 2007 related to these


bonds is $451,588 ($226,269 + $225,319).

(2)

When the bonds are sold at a premium, the effective-interest method


will result in more interest expense reported than the straight-line
method in 2007. Straight-line interest expense for 2007 is $432,046
[$250,000 + $250,000 ($33,977 + *$33,977)].
*$679,533 20

(3)

The total cost of borrowing is as shown below:

Semiannual interest payments


($5,000,000 X 10% X 1/2) = $250,000 X 20......................................
$5,000,000
Less: Bond premium ($5,679,533 $5,000,000).................................
679,533
Total cost of borrowing................................................................
$4,320,467
(4)

The total bond interest expense over the life of the bonds is the same
under either method of amortization.

If you have other questions, please contact me.


Sincerely,