Classification of Liabilities Assignment

E14.1 (LO1) (Classification of Liabilities) Presented below are various account balances.

  1. Bank loans payable of a winery, due March 10, 2022. (The product requires aging for 5 years before sale.)
  2. Serial bonds payable, €1,000,000, of which €250,000 are due each July 31.
  3. Amounts withheld from employees' wages for income taxes.
  4. Notes payable due January 15, 2021.
  5. Credit balances in customers' accounts arising from returns and allowances after collection in full of account.
  6. Bonds payable of €2,000,000 maturing June 30, 2020.
  7. Overdraft of €1,000 in a bank account. (No other balances are carried at this bank.)
  8. Deposits made by customers who have ordered goods.

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)

  • Non-current liability

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.

  1. The issuance of the bonds.
  2. The payment of interest and the related amortization on July 1, 2019.
  3. The accrual of interest and the related amortization on December 31, 2019.

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.)

  1. The issuance of the bonds.
  2. The payment of interest and related amortization on July 1, 2019.
  3. The accrual of interest and the related amortization on December 31, 2019.

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

  1. Prepare the journal entries to record the following transactions.
  2. The issuance of the bonds on June 30, 2018.
  3. The payment of interest and the amortization of the premium on December 31, 2018.
  4. The payment of interest and the amortization of the premium on June 30, 2019.
  5. The payment of interest and the amortization of the premium on December 31, 2019.
  6. Show the proper statement of financial position presentation for the liability for bonds payable on the December 31, 2019, statement of financial position.
  7. Provide the answers to the following questions.
  8. What amount of interest expense is reported for 2019?
  9. Determine the total cost of borrowing over the life of the bond.

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

  1. Prepare the journal entry to record the initial transaction on January 1, 2019.
  2. Prepare the journal entry to record any adjusting entries needed at December 31, 2019. Assume that the sales of Durdil's product to this customer occur evenly over the 3-year period.

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%
for 3 years (PVF3, 8%) ( Table 6-2)


X .79383

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

  1. Prepare a note amortization schedule for the first year.
  2. Indicate the amount the customer owes on the contract at the end of the first year.
  3. Compute the amount of the new quarterly payments.
  4. Prepare a note amortization schedule for these new payments for the next 2 years.
  5. What do you think of the new sales promotion used by Good-Deal?

PROBLEM 14.3

(a)



Date

(1)
Cash Paid

(2)
Interest Expense

@2%

(1) – (1)

Change in
Carrying Amount

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)



Date


Cash Paid


Interest Expense

Change in
Carrying Amount

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.

  1. December 31, 2018.
  2. December 31, 2019.
  3. December 31, 2020.
  4. December 31, 2021.
  5. December 31, 2022.

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


Date

(1)
Cash Paid

(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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