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Chapter 12
Demonstration Problems
Long-Term Liabilities
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-1
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-2
Consider the following note payable transactions of Precious Manufacturing Technologies.
E12-17D
2014
May 1 Purchased equipment costing $100,000 by issuing a ten-year, 15% note payable. The note requires annual principal payments of $10,000 plus interest each May 1.
Dec. 31 Accrued interest on the note payable.
2015
May 1 Paid the first installment on the note.
Dec. 31 Accrued interest on the note payable.
Requirements
1. Journalize the transactions for the company.
2. Considering the given transactions only, what are Precious Manufacturing Technologies' total liabilities on December 31, 2015?
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-3
May. 1: Purchased equipment costing $100,000 by issuing a ten-year, 15% note payable.
E12-17D—Req.1
Date Accounts and Explanation Debit Credit
2014
May 1 Equipment 100,000
Notes Payable 100,000
Purchased equipment by issuing a 10-year, 15% note.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-4
Dec. 31: Accrued interest on the note payable.
E12-17D—Req.1
Date Accounts and Explanation Debit Credit
2014
Dec. 31 Interest Expense ﴾$100,000 × 0.15 × 8/12﴿ 10,000
Interest Payable 10,000
Recognized accrued interest.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-5
May 1: Paid the first installment on the note.
E12-17D—Req.1
Date Accounts and Explanation Debit Credit
2015
May 1 Interest Expense ($100,000 × 0.15 × 4/12) 5,000
Interest Payable 10,000
Notes Payable 10,000
Cash 25,000
Paid first installment of note.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-6
Dec. 31: Accrued interest on the note payable.
E12-17D—Req.1
Date Accounts and Explanation Debit Credit
2015
Dec. 31 Interest Expense ($90,000 × 0.15 × 8/12) 9,000
Interest Payable 9,000
Recognized accrued interest.
Dec. 31, 2015
Interest Payable ﴾$90,000 × 0.15 × 8/12﴿ $9,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-7
E12-17D—Req.2
Precious Manufacturing Technologies' total liabilities on December 31, 2015
Dec. 31, 2015
Interest Payable ﴾$90,000 × 0.15 × 8/12﴿ $9,000
Notes Payable 90,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-8
E12-17D—Req.2
Precious Manufacturing Technologies' total liabilities on December 31, 2015
Dec. 31, 2015
Interest Payable ﴾$90,000 × 0.15 × 8/12﴿ $9,000
Notes Payable 90,000
Total liabilities $99,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-9
E12-17D—Req.2
Precious Manufacturing Technologies' total liabilities on December 31, 2015
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-10
E12-23D
Requirements
1. Journalize the issuance of the bonds on January 1, 2014.
2. Journalize the semi-annual interest payment and amortization of bond premium on June 30, 2014.
3. Journalize the semi-annual interest payment and amortization of bond premium on December 31, 2014.
4. Journalize the retirement of the bond at maturity. (Give the date.)
On January 1, 2014, Danial Unlimited issues 8%, 15-year bonds payable with a face value of $180,000. The bonds are issued at 102 and pay interest on June 30 and December 31.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-11
For issuance of the bonds on January 1, 2014
E12-23D—Req.1
Date Accounts and Explanation Debit Credit
2014
Jan. 1 Cash ($180,0000 × 1.02) 183,600Premium on Bonds Payable ($183,600 − $180,000)
3,600
Bonds Payable 180,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-12
For semi-annual interest payment and amortization of bond premium on June 30, 2014
E12-23D—Req.2
Date Accounts and Explanation Debit Credit
2014
Jun. 30 Interest Expense ($7,200 − $120) 7,080
Premium on Bonds Payable ($3,600 × 1/30) 120
Cash ($180,000 × 0.08 × 6/12) 7,200
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-13
For semi-annual interest payment and amortization of bond premium on Dec. 30, 2014
E12-23D—Req.3
Date Accounts and Explanation Debit Credit
2014
Dec. 30 Interest Expense ﴾$7,200 − $120﴿ 7,080
Premium on Bonds Payable ﴾$3,600 × 1/30﴿ 120
Cash ﴾$180,000 × 0.08 × 6/12﴿ 7,200
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-14
For the retirement of the bond at maturity
E12-23D—Req.4
Date Accounts and Explanation Debit Credit
2029
Jan. 1 Bonds Payable 180,000
Cash 180,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-15
E12-26D
At December 31, Mad Style Metals owes $30,000 on Accounts Payable, Salaries Payable of $10,000, and Income Tax Payable of $7,000. Mad Style also has $220,000 of Bonds Payable that were issued at face value that require payment of a $22,000 installment next year and the remainder in later years. The bonds payable require an annual interest payment of $2,200, and Mad Style still owes this interest for the current year.
Report Mad Style’s liabilities on its classified balance sheet. List the current liabilities in descending order (largest first and so on), and show the total of current liabilities.
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-16
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-17
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000Current Portion of Bonds Payable 22,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-18
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000Current Portion of Bonds Payable 22,000Salaries Payable 10,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-19
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000Current Portion of Bonds Payable 22,000Salaries Payable 10,000Income Tax Payable 7,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-20
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000Current Portion of Bonds Payable 22,000Salaries Payable 10,000Income Tax Payable 7,000Interest Payable 2,200
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-21
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000Current Portion of Bonds Payable 22,000Salaries Payable 10,000Income Tax Payable 7,000Interest Payable 2,200Total Current Liabilities $71,200
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-22
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000Current Portion of Bonds Payable 22,000Salaries Payable 10,000Income Tax Payable 7,000Interest Payable 2,200Total Current Liabilities $71,200
Long-Term LiabilitiesBonds Payable 198,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-23
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000Current Portion of Bonds Payable 22,000Salaries Payable 10,000Income Tax Payable 7,000Interest Payable 2,200Total Current Liabilities $71,200
Long-Term LiabilitiesBonds Payable 198,000Total Long-Term Liabilities 198,000
Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall 12-24
E12-26DAccounts Payable $30,000
Current Portion of Bonds Payable 22,000
Salaries Payable 10,000
Income Tax Payable 7,000
Interest Payable 2,200
Bonds Payable 198,000
Mad Style MetalsBalance Sheet (Partial)
Dec-31LiabilitiesCurrent Liabilities
Accounts Payable $30,000Current Portion of Bonds Payable 22,000Salaries Payable 10,000Income Tax Payable 7,000Interest Payable 2,200Total Current Liabilities $71,200
Long-Term LiabilitiesBonds Payable 198,000Total Long-Term Liabilities 198,000
Total Liabilities $269,200
End of Chapter 12
12-25Copyright © 2014 Pearson Education, Inc. publishing as Prentice Hall