Chap007 - Accounting for and Presentation of Liabilities...

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Unformatted text preview: Accounting for and Presentation of Liabilities SOLUTIONS: E7-1. Discount basis means interest is paid in advance. a. Proceeds = Face amount of note - Interest = $300,000 - ($300,000 * 9% * 6/12) = $300,000 - $13,500 = $286,500 April 15, 2002 Dr. Cash.......................................................................................... $286,500 Dr. Discount on Notes Payable...................................................... 13,500 Cr. Notes Payable..................................................................... $300,000 To record the proceeds of a short-term note payable (discount basis). Balance Sheet Income Statement Assets = Liabilities + Owners Equity Net income = Revenues - Expenses Cash Notes Payable (Note: The discount account is a contra liability, + 286,500 + 300,000 so the initial carrying value of the note is equal Discount on to the cash proceeds received-- which is the Notes Payable approach taken when interest is calculated- 13,500 on a straight basis.) b. The note was dated April 15, 2002, so 2 months have passed from the time the note was signed until the June 30, 2002 fiscal year-end. Interest = $300,000 * 9% * 2/12 = $5,625 c. Current liability = Face amount less discount balance. = $300,000 - ($13,500 - $5,625) = $300,000 - $7,875 = $292,125 E7-2. a. Discount = Principal (Maturity value) - Proceeds = $240,000 - $232,000 = $8,000 Discount rate = Discount / (Principal * Time) = $8,000 / ($240,000 * 5/12) = 8% b. Effective rate = Discount / (Proceeds * Time) = $8,000 / ($232,000 * 5/12) = 8.3% c. 1. August 1, 2002 Dr. Cash .................................................................................... $232,000 Dr. Discount on Notes Payable................................................. 8,000 Cr. Notes Payable............................................................... $240,000 To record the proceeds of a short-term note payable (discount basis). E7-2. c. (continued) Chapter 7 2. September 30, 2002 Dr. Interest Expense ($240,000 * 8% * 1/12)........................... $1,600 Cr. Discount on Notes Payable............................................ $1,600 To record interest expense and discount amortization for one month. 3. December 31, 2002 Dr. Notes Payable...................................................................... $240,000 Cr. Cash................................................................................ $240,000 To record the repayment of a short-term note. The discount is amortized for $1,600 each month, and would be fully amortized at the maturity date. Balance Sheet Income Statement Assets = Liabilities + Owners Equity Net income = Revenues - Expenses 1. On August 1, 2002 to record loan proceeds: Cash Notes Payable + 232,000 + 240,000 (Note: The discount account is a contra liability, Discount on so the initial carrying value of the note is equal Notes Payable to the cash proceeds received.)- 8,000 2. On September 30, 2002 (and each month-end) to record interest expense:...
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Chap007 - Accounting for and Presentation of Liabilities...

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