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# chap007 - Instructors Manual Solutions Manual CHAPTER 7...

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Instructor’s Manual / Solutions Manual CHAPTER 7 Accounting for and Presentation of Liabilities SOLUTIONS: Matching I Matching II 1. Q 6. K 1. I 6. M 2. C 7. I 2. B 7. E 3. A 8. P 3. H 8. N 4. G 9. N 4. O 9. J 5. B 10. M 5. K 10. C Multiple Choice 1. A 6. E 2. E 7. B 3. E 8. C 4. E 9. D 5. C 10. E Multiple Choice Annotations: 1. Interest owed on short-term notes would be an example of an accrued liability, but the Notes Payable itself is recorded when money is borrowed. All of the other answers are examples of amounts that are accrued. 6. Mere negotiations are not enough to justify the recording of a liability, because an exchange transaction has not yet taken place. Liabilities are the result of “past transactions or events.” 8. If the market interest rate rises after the bonds are authorized but before they are issued, investors will not be willing to pay the full face amount for the bonds—because they could earn a higher interest rate by investing in the bonds of another similar company. Thus, the bonds will sell at a discount. 9. Property Taxes Payable would also increase (credit).

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Chapter 7 Accounting for and Presentation of Liabilities E7.1. a. Discount basis means interest is paid in advance. Proceeds = Face amount of note - Interest = \$300,000 - (\$300,000 * 9% * 6/12) = \$300,000 - \$13,500 = \$286,500 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.) April 15, 2009 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). b. c. The note was dated April 15, 2009, so 2.5 months have passed from the time the note was signed until the June 30, 2009 fiscal year-end. Interest = \$300,000 * 9% * 2.5/12 = \$ 5,625 Current liability = Face amount less discount balance. = \$300,000 - (\$13,500 - \$5,625) = \$300,000 - \$7,875 = \$292,125 E7.2. a. b. Discount = Principal (Maturity value) Proceeds = \$240,000 - \$232,000 = \$8,000 Discount rate = Discount / (Principal * Time) = \$8,000 / (\$240,000 * 5/12) = 8% Effective rate = Discount / (Proceeds * Time) = \$8,000 / (\$232,000 * 5/12) = 8.3%
Instructor’s Manual / Solutions Manual E7.2. (continued) c. Balance Sheet Income Statement . Assets = Liabilities + Owners’ Equity Net income = Revenues - Expenses 1. On August 1, 2009 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, 2009 (and each month-end) to record interest expense: Discount Interest Note Payable (Note: A reduction of the discount Expense + 1,600 increases the carrying value.) - 1,600 3. On December 31, 2009 to record principal repayment: Cash Notes Payable - 240,000 - 240,000 Journal entries: 1. August 1, 2009 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).

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