ACCT 352 Chapter Notes - Chapter 14: Effective Interest Rate, Promissory Note, Interest Expense

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scarletcattle835

22 May 2012

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Lt debt consists of obligations that are not payable within a year or the operating cycle of the business, whichever is longer, and will therefore require probable sacrifices of econ benefits in the future. Bonds payable, lt notes payable, pension liabilities and lease liabilities. Often these are with restrictive covenants (i. e. terms or conditions) that are meant to limit activities and protect both the lender and borrowers. Bonds are the most common type of lt debt that companies report on their bs. Main purpose of bonds is to borrow for the lt when the amount of capital that is needed is too large for one lender to supply. The difference between current notes payable and lt notes payable is the maturity date. Lt notes are similar in substance to bonds as both have fixed maturity dates and carry either a stated or implicit interest rate.

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Fridley Manufacturing's accounting records reveal the following account balances after adjusting entries are made on December 31, 2018:

Accounts payable		$ 62,500
Bonds payable (9.4%, due in 2025)		800,000
Lease liability*		41,500
Bonds payable (8.7%, due in 2021)		50,000
Deferred tax liability*		133,400
Discount on bonds payable (9.4%, due in 2025)		12,600
Income tax payable		26,900
Interest payable		38,700
Installment note payable (8% equal installments due 2019 to 2022)		120,000
Notes payable (7.8%, due in 2023)		400,000
Premium on notes payable (7.8%, due in 2023)		6,100
Zero coupon note payable, $50,000 face amount, due in 2024 (net of discount)		31,900

* Long-term liability

Required:

Prepare the current liabilities and long-term debt portions of Fridley's statement of financial position at December 31, 2018. Provide a separate line item for each issue (do not combine separate bonds or notes payable), but some items may need to be split into more than one item.

Fridley Manufacturing
Liabilities Section of the Statement of Financial Position
December 31, 2018
Liabilities
Current liabilities:
Accounts payable	$
Interest payable
Income tax payable
Current portion of installment note
Total current liabilities		$
Long-term liabilities:
Bonds payable:
Bonds payable (8.7%, due in 2021)
Bonds payable (9.4%, due in 2025)	$
Less: Discount on bonds payable
Notes payable:
Notes payable (7.8%, due in 2023)	$
Add: Premium on notes payable
Installment note payable (8%)
Note payable (4%, due in 2024)	$
Less: Discount on note payable
Other long-term liabilities:
Lease liability
Deferred tax liability
Total liabilities		$

amethystgerbil16

During 2015, The Mann Corporation borrowed $500,000 from TheBiltmore National Bank. The loan agreement included a debt covenantrestricting the companyâs level of debt relative to shareholdersâequity. The covenant specified that Mannâs long-term debt toshareholdersâ equity ratio could not exceed 1-to-1 at any timeduring the loan period. The Mann Corporationâs 2015 year-endbalance sheet appeared as follows:

		2015
Total assets		$ 2,001,600
Current liabilities		$ 542,100
Long-term debt		625,500
Shareholders' equity		834,000
		$ 2,001,600

Calculate The Mann Corporationâs long-term debt to shareholdersâequity ratio at year-end 2015.
Round answer to two decimal places. Answer
What is the companyâs maximum borrowing capability at year-end 2015without violating the long-term debt to shareholdersâ equitycovenant of the existing loan agreement? $Answer
What is the maximum dividend that the company can pay at year-endwithout violating the debt covenant? $Answer
If the company pays a cash dividend of $100,000 at year-end 2015,what is the companyâs maximum borrowing capability withoutviolating the debt covenant? $Answer

bronzehorse943

Diane Corporation is preparing its year-end balance sheet. Thecompany records show the following selected amounts at the end ofthe year:


Total assets	$	590,000
Total noncurrent assets		350,000
Liabilities:
Notes payable (8%, due in 5years)		23,000
Accounts payable		55,000
Income taxes payable		11,000
Liability for withholdingtaxes		4,000
Rent revenue collected inadvance		9,000
Bonds payable (due in 15years)		105,000
Wages payable		9,000
Property taxes payable		5,000
Note payable (10%, due in 6months)		14,000
Interest payable		600
Common stock		180,000

Required:

1-a. What is the amount of currentliabilities?

1-b. Compute working capital.

2. Would your computation be different if thecompany reported $300,000 worth of contingent liabilities in thenotes to its financial statements?

	Yes
	No

ACCT 352 Chapter Notes - Chapter 14: Effective Interest Rate, Promissory Note, Interest Expense

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