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M9-2, M9-3, M9-4, E9-4, E9-15, and P9-1
M9-2 LO4
Record a Note Payable:
Farmers Corporation borrowed $290,000 on October 1, 2009. The note carried a 10 percent interest rate with the principal and interest payable on May 1, 2010. (a)Prepare the journal entry to record the note on October 1. (b)Prepare the adjusting entry to record accrued interest on December 31.
October 1
Cash (+A) / 290,000Note payable (+L) / 290,000
December 31
Interest Expense (+E, -SE) / 7,250Interest Payable (+L) / 7,250
M9-3 LO1, 3, 6
Finding Financial Information:
For each of the following items, specify whether the information would be found in the balance sheet, income statement, the statement of cash flows, the notes to the statements, or not at all.
1.The amount of working capital
2.The total amount of current liabilities
3.Information concerning company pension plans
4.The accounts payable turnover ratio
5.Information concerning the impact of changes in working capital on cash flows for the period.
1. Not reported, but can be computed from the Balance Sheet
2. Balance sheet
3. Notes to the statements
4. Not reported but can be computed from balance sheet and income statement data.
5. Statement of cash flows
M9-4 LO2
Computing Measures of Liquidity:
The balance sheet for Shaver Corporation reported the following:
Total assets $360,000
Non-current assets$290,000
Current Liabilities $46,000
Total Stockholders’ Equity $92,000
Compute Shaver’s current ratio and working capital
Current Ratio: $121,000 / $46,000 = 2.63
Working Capital: $ 121,000 - $ 46,000 = $ 75,000
E9-4 LO1, 4
Recording a Note Payable through Its Time to Maturity with Discussion of Management Strategy:
Many businesses borrow money during periods of increased business activity to finance inventory and accounts receivable, Neiman Marcus is one of America’s most prestigious retailers. Each Christmas season, Neiman Marcus builds up its inventory to meet the needs of Christmas shoppers. A large portion of these Christmas sales are on credit. As a result, Neiman Marcus often collects cash from the sales several months after Christmas. Assume that on November 1, 2009, Neiman Marcus borrowed $4.8 million cash from Texas Capital Bank for working capital purpose and signed an interest-bearing note due in six months. The interest rate was 8 percent per annum payable at maturity. The accounting period ends December 31.
Required:
1.Give the journal entry to record the note on November 1.
November 1
Cash (+A) / 4,800,000Note payable (+L) / 4,800,000
Borrowed on 6-month, 8%, note payable.
2.Give any adjusting entry required at the end of the annual accounting period.
December 31 (end of the accounting period):
Interest expense (+E, -SE) / 64,000Interest payable (+L) / 64,000
Adjusting entry for 2 months’ accrued interest
($4,800,000 x 8% x 2/12 = $64,000).
3.Give the journal entry to record payment of the note and interest on the maturity date, April 30,2010
April 30 (maturity date):
Note payable (-L) / 4,800,000Interest payable (per above) (-L) / 64,000
Interest expense ($4,800,000 x 8% x 4/12) (+E, -SE) / 128,000
Cash (-A) / 4,992,000
Paid note plus interest at maturity.
4.If Neiman Marcus needs extra cash during every Christmas season, should management borrow money on a long-term basis to avoid the necessity of negotiating a new short-term loan each year?
It is doubtful that long-term borrowing would be appropriate in this situation. After the Christmas season, Neiman Marcus will collect cash from its credit sales. At this point, it does not need borrowed funds. It would be costly to pay interest on a loan that was not needed. It might be possible to borrow for a longer term at a lower interest rate and invest idle cash to offset the interest charges. Neiman Marcus should explore this possibility with its bank but in most cases it would be better to borrow on a short-term basis to meet short-term needs.
E9-15 LO8
Computing Four Present Value Problems:
On January 1, 2009, Vigeland Company completed the following transaction (assume a 10 percent annual interest rate).
a.Bought a delivery truck and agreed to pay $50,000 at the end of three years.
b.Rented an office building and was given the option of paying $10,000 at the end of each of the next three years or paying $28,000 immediately.
c.Established a savings account by depositing a single amount that will increase to $40,000 at the end of 7 years.
d.Decided to deposit a single sum in the bank that will provide 10 equal annual year-end payments of $15,000 to a retired employee (payments starting December 31, 2009.
Required?show computation and round to the nearest dollar):
1.What is the cost of the truck that should be recorded at the time of purchase?
$50,000 x 0.7513
= $37,565
2.Which option for the office building should the company select?
$10,000 x 2.4869
= $24,869
It is better to pay in three installments because the economic cost is less.
3.What single amount must be deposited in this account on January 1, 2009?
$40,000 x 0.5132
= $20,528
4.What single sum must be deposited in the bank on January 1, 2009?
$15,000 x 6.1446
= $92,169
P9-1 LO1
Recording and Reporting Current Liabilities:
Curb Company completed the following transactions during 2009. The annual accounting periods ends December 31, 2009.
Jan. 15- Purchased and paid for merchandise for resale at an invoice cost of $14,200; periodic inventory system.
Apr. 1 – Borrowed $700,000 from Summit Bank for general use; executed an 10-month, 8 percent interest-bearing note payable.
June 14 – Received a $15,000 customer deposit from Mark Muller for services to be performed in the future.
July 15 – Performed $3,750 of the services paid for by Mr. Muller.
Dec. 12 – Received electric bill for $27,860. The company will pay it in early January.
Dec. 31 – Determine wages of $15,000 earned but not yet paid on December 31 (disregard payroll taxes).
Required:
1.Prepare journal entries for each of these transactions.
January 15:
Purchases (+A) / 14,200Cash (-A) / 14,200
April 1:
Cash (+A) / 700,000Note payable, short term (+L) / 700,000
June 14:
Cash (+A) / 15,000Unearned revenue (+L) / 15,000
July 15:
Unearned revenue (-L) / 3,750Revenue (+R, +SE) / 3,750
December 12:
Electric expense (+E, -SE) / 27,860Electric payable (+L) / 27,860
December 31:
Wage expense (+E, -SE). / 15,000Wages payable (+L) / 15,000
2.Prepare all adjusting entries required on December 31, 2009
December 31:
Interest expense (+E, -SE). / 42,000Interest payable (+L) / 42,000
($700,000 x 8% x 9/12 = $42,000).