financial accounting 7th edition

Chapter Ten

Challenge Exercise 1Expands on: E10-1LO: 2

Jake Anderson Company had the following transactions involving notes payable. June 1, 2014 Borrows $70,000 from First National Bank by signing a 9-month, 12% note. Dec. 1, 2014 Borrows $90,000 from Sycamore State Bank by signing a 3-month, 10% note. Dec. 31, 2014 Prepares adjusting entries. Mar. 1, 2015 Pays principal and interest to Sycamore State Bank. Mar. 1, 2015 Pays principal and interest to First National Bank.

Instructions: (a) Prepare journal entries for each of the transactions shown above.(b) What effect do the 12/31/14 entries have on assets, liabilities, and stockholders’ equity.(c) What amount of interest expense is reported in the 2014 income statement and in the 2015 income statement?

Copyright © 2012 John Wiley & Sons, Inc. Weygandt, Financial and Managerial Accounting, Challenge Exercises

(For Instructor Use Only) 0-1

Challenge Exercise 2Expands on: 10-4LO: 3

Princess Company publishes a monthly fashion magazine, Tiara. Subscriptions to the magazine cost $30 per year. During October 2014, Princess sells 12,000 subscriptions beginning with the November issue. Princess prepares financial statements quarterly and recognizes subscription revenue earned at the end of the quarter. The company uses the accounts Unearned Subscription Revenue and Subscription Revenue.

Instructions: (a) Prepare the entry in October for the receipt of the subscriptions. (b) Prepare the adjusting entry at December 31, 2014, to record sales revenue recognized in December 2014.(c) Indicate the effect that the transactions in (a) and (b) have on assets, liabilities, and stockholders’ equity.(d) Prepare the adjusting entry at March 31, 2015, to record sales revenue recognized in the first quarter of 2015.(e) Indicate how the unearned subscription revenue is reported in the 3/31/15 financial statements, including the amount.


(For Instructor Use Only) Page 10-2


Ben Borke’s gross earnings for the week were $2,000, his federal income tax withholding was $338, his state income tax withholding was $45, and his FICA total was $153. Federal and state unemployment taxes are $16 and $108, respectively.

Instructions (a) What was Borke’s net pay for the week? (b) Journalize the entry for the recording of his pay in the general journal. (Note: Use Salaries and Wages Payable; not Cash.) (c) Record the issuing of the check for Borke’s pay in the general journal.(d) Prepare the entry to record the employer’s payroll taxes.




The following financial data were reported by XYZ Company for 2013and 2014 (dollars in millions).

XYZ CompanyBalance Sheets (partial)

2014 2013Current assets

Cash and cash equivalents $2,000 $1,100Accounts receivable, net 3,900 3,000Inventories 2,700 2,300Other current assets 700 1,150Total current assets $9,300 $7,550

Current liabilities $7,700 $5,500

Instructions: (a) Calculate the current ratio and working capital for XYZ for 2014 and 2013. (b) Suppose at the end of 2014, XYZ management used $400 million cash to pay off $400 million of accounts payable. How would the current ratio and working capital have changed?(c) Suppose at the end of 2014, XYZ management collected $300 million cash on accounts receivable. How would the current ratio and working capital have changed?(d) Suppose at the end of 2014, XYZ management sold $250 million of inventory for $400 million on account. How would the current ratio and working capital have changed?




Deep South Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are: 1. Issue 80,000 shares of common stock at $50 per share. (Cash dividends have not been paid nor is the payment of any contemplated). 2. Issue 10%, 10-year bonds at par for $4,000,000. It is estimated that the company will earn $1,185,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 120,000 shares of common stock outstanding prior to the new financing.

Instructions: (a) Determine the effect on net income and earnings per share for these two methods of financing. (b) What are the advantages and disadvantages of issuing bonds?




On January 1, Oldur Company issued $700,000, 12%, 10-year bonds at par. Interest is payable semiannually on July 1 and January 1.

Instructions: (a) Present journal entries to record the following.

(1) The issuance of the bonds. (2) The payment of interest on July 1, assuming that interest was not accrued on June 30. (3) The accrual of interest on December 31.

(b) What effect does each of these transactions have on assets, liabilities, and stockholders’ equity?



Challenge Exercise 7Expands on: E10-13LO: 5, 6

The following section is taken from Ditka Corp.’s balance sheet at December 31, 2013. Current liabilities

Interest payable $ 108,000 Long-term liabilities

Bonds payable, 9%, due January 1, 2018 2,400,000 Interest is payable semiannually on January 1 and July 1. The bonds are callable on any interest date.

Instructions :(a) Journalize the payment of the bond interest on January 1, 2014. (b) Assume that on January 1, 2014, after paying interest, Ditka calls bonds having a face value of $900,000. The call price is 104. Record the redemption of the bonds. (c) Prepare the entry to record the payment of interest on July 1, 2014, assuming no previous accrual of interest on the remaining bonds.(d) Prepare the entry to record the retirement of half the bonds still outstanding on July 2, 2014 for a cash payment of $739,000.




Tea Co. receives $240,000 when it issues a $300,000, 10%, mortgage note payable to finance the construction of a building at December 31, 2014. The terms provide for semiannual installment payments of $25,000 on June 30 and December 31.

Instructions (a) Prepare the journal entries to record the mortgage loan and the first two installment payments.(b) Indicate how the remaining balance of the mortgage note payable is reported in the balance sheet.




Dave Ramsey Corporation issued $900,000, 9%, 10-year bonds on January 1, 2014, for $843,920.This price resulted in an effective-interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Dave Ramsey uses the effective-interest method to amortize bond premium or discount.

Instructions: Prepare the journal entries to record the following. (Round to the nearest dollar.)

(a) The issuance of the bonds. (b) The payment of interest and the discount amortization on July 1, 2014, assuming that interest was not accrued on June 30. (c) The accrual of interest and the discount amortization on December 31, 2014.(d) What will the total interest expense be over the 10 years the bonds are outstanding?(e) What would the total interest expense be over the 10 years the bonds are outstanding, if the straight-line method was used?



financial accounting 7th edition

Documents