Problem 1 (10 points)
Described below are certain transactions of Carson Company for 2008:
On December 27, the company purchased goods from Jay Company for $50,000,
terms 2/10, n/30.
Purchases and accounts payable are recorded at
On September 30, the company issued its $120,000 at 90, one-year zero-interest-
bearing note at First State Bank. The firm did not amortize the discount of note.
On December 1, the company declared cash dividends of $100,000 and stock
dividend of 1,000 common shares with par value of $10 per share (market price of
common share at the declaration is $35). The dividends are not paid yet until at the
end of 2008.
On December 31, 2008, the company has $2,000,000 of short-term notes payable
due on February 14, 2009. On January 10, 2009, the company arranged a line of
credit with County Bank which allows Carson to borrow up to $1,500,000 at one
percent above the prime rate for three years. On February 2, 2009, Carson borrowed
$1,200,000 from County Bank and used $500,000 additional cash to liquidate
$1,700,000 of the short-term notes payable. The company issued financial statement
of 2008 on March 15, 2009.
A suit for breach of contract seeking damages of $3,400,000 was filed by an author
against Carson Co. on October 4, 2008. Carson's legal counsel believes that an
unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff
is between $1,000,000 and $1,900,000. No amount within this range is a better
estimate of potential damages than any other amount. The company expects that the
law suit will be settled in 2009.
Prepare a partial balance sheet for Carson Company, showing the manner in which the above
liabilities should be presented at December 31, 2008 (Please indicate the manner in which the
above transactions should be reflected in
– current or long-term
Note payable (First State)
Discount on N/P