Chapter 13, Problem 13.2P

(1)

To determine

Notes Payable

Notes payable is a legal agreement prepared between issuer and payee. It is agreement between issuer and payee towards payment of total amount (principal and interest) based on certain interest and conditions. Here, particular value of interest is paid on the face value of note payable and thus, referred to interest payable.

To prepare: Journal entries for these transactions.

Explanation of Solution

On September 5, 2016 (transaction a), the loan is not made from the line of credit. Hence, no entry is made.

Journal entry to record the cash borrowed on 10% notes payable

Date		Accounts and Explanation			Post Ref		Debit ($)	Credit ($)
Transaction b		Cash					12,000,000
October	2018
			Notes Payable					12,000,000
				(To record the borrowed of cash on 10% notes payable)

When cash is borrowed on 10% notes payable, cash and notes payable increases. Cash is an asset and thus, Cash account increases with $12,000,000. Notes payable is a liability and thus, credit Notes payable account with $12,000,000.

Journal entry to record collection of refundable deposit

Date		Accounts and Explanation			Post Ref		Debit ($)	Credit ($)
Transaction c		Cash					2,600
December	2018
			Liability - Refundable Deposits					2,600
				(To record the collection of refundable deposits)

When collection of refundable deposits is recorded, cash and liability – refundable deposits are the accounts affected. Cash is an asset and thus, Cash account increases with $2600 due to collection of refundable deposits. Notes payable is a liability and is increased. Thus, credit Notes payable account with $2,600.

Journal entry to record the sales for 2018

Date		Accounts and Explanation			Post Ref		Debit ($)	Credit ($)
Transaction d
December	2018	Accounts Receivable					4,346,000
			Sales Revenue					4,100,000
			Sales Taxes Payable					246,000
				(To record the sales for 2018)

When sales for 2018 are recorded, the following three accounts are affected: Accounts receivables, sales revenue, and sales tax payable. Accounts receivables increases the asset due to sales made on credit. Sales revenue increases the equity due to receipt of revenue due to sales made. Sales tax payable increases the liability account since, tax amount is due. Thus, asset (account receivable), equity (sales revenue), and liability (sales tax payable) increases. Hence, debit accounts receivable account with 4,346,000; credit Sales Revenue and Sales Taxes Payable with $4,100,000 and $246,000.

Working note to determine the amount of sales tax due is as follows:

$\begin{array}{c}\text{Sales taxes payable = Sales revenue }\times \text{ Sales taxes rate}\\ \text{= \$4,100,000}\times \left(3\%+3\%\right)\\ =\$246,000\end{array}$

Journal entry to record the interest expense for 3 months.

Date		Accounts and Explanation			Post Ref		Debit ($)	Credit ($)
Transaction e
December	2018	Interest Expense					300,000
			Interest Payable					300,000
				(To record the interest expense for 3 months)

When interest expense is recorded for 3 months, interest expense and interest payable accounts are affected. Interest expense affects the equity account and interest payable affects the liability account. Interest expense is an expense and reduces the equity. Thus, debit interest expense with $300,000. Interest Payable is a liability and is increased. Thus, credit interest payable with $300,000. Working note for determining interest expense is as below:

$\begin{array}{c}\text{Interest}\text{expense}=\text{Principal}\text{amount}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\$12,000,000\times 10\%\times \frac{3}{12}\\ =\$300,000\end{array}$

Journal entry to record the issue of bonds at face value.

Date		Accounts and Explanation			Post Ref		Debit ($)	Credit ($)
Transaction f
February	2019	Cash					10,000,000
			Bonds Payable					10,000,000
				(To record the issue of bonds at face value)

When bonds are issued at face value, cash and bonds payable account are affected. Cash is an asset and increased due to issuance of bonds. Bonds payable is a liability and is increased due to issuance. Hence, debit cash account and credit bonds payable account with $10,000,000.

Journal entry to record the payment of loan and interest.

Date		Accounts and Explanation			Post Ref		Debit ($)	Credit ($)
Transaction f		Notes Payable (L–)					12,000,000
March	2019
		Interest Expense (E–)					200,000
		Interest Payable (L–)					300,000
			Cash (A–)					12,500,000
				(To record the payment of loan and interest)

Payment of loan involves the following accounts: Notes payable, Interest expense, interest payable account, and cash. Notes payable and interest payable are liability and is decreased due to payment of loan and interest. Interest expense is an expense and decreases the equity account. Cash is an asset and decreased due to payment of loan and interest. Thus, debit notes payable, interest expense, and interest payable with $12,000,000, $200,000, and $300,000; credit Cash with $12,500,000.

Working note to calculate interest expense for 2 months (December 31, 2018 to March 1, 2019) on 10% note is as follows:

$\begin{array}{c}\text{Interest}\text{expense}=\text{Principal}\text{amount}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\$12,000,000\times 10\%\times \frac{2}{12}\\ =\$200,000\end{array}$

Working note for determining interest payable is as follows:

$\begin{array}{c}\text{Interest}\text{payable}=\text{Principal}\text{amount}\times \text{Rate}\text{of interest}\times \text{Time}\\ =\$12,000,000\times 10\%\times \frac{3}{12}\\ =\$300,000\end{array}$

Working note to determine the amount of cash is as follows:

$\begin{array}{c}\text{Cash = Notes payable + Interest expense + Interest payable }\\ =\$12,000,000+\$200,000+\$300,000\\ =\$12,500,000\end{array}$

Journal entry to record the return of refundable deposits.

Date		Accounts and Explanation			Post Ref		Debit ($)	Credit ($)
Transaction g
March	2017	Liability - Refundable Deposits (L+)					1,300
			Cash (A–)					1,300
				(To record the return of refundable deposits)

Return of refundable deposits involves Liability - Refundable Deposits and Cash account. Liability – Refundable deposits is a liability and increased due to returns made. Cash is decreased to refunds made. Thus, debit Liability - Refundable Deposits account and credit Cash account with $1,300.

Working notes to determine the amount of return of refundable deposits:

$\begin{array}{c}\begin{array}{l}\text{Amount of return }\\ \text{of refundable deposits}\end{array}\}\text{ = Refundable deposits }\times \frac{1}{2}\\ =\$2,600\times \frac{1}{2}\\ =\$1,300\end{array}$

(2)

To determine

To prepare: Current and long-term liability sections of the December 31, 2016, balance sheet.

Explanation of Solution

Balance sheet (Partial) December 31, 2016
Current liabilities:
Accounts payable	$252,000
Current portion of bank loan	$2,000,000
Liability – Refundable deposits	$2,600
Sales taxes payable	$246,000
Accrued interest payable	$300,000
Total current liabilities	$2,800,600
Long-term liabilities:
Bank loan to be refinanced on a long-term basis	$10,000,000

The total amount of loan is $12,000,000. The company is intended to refinance the total amount of bank loan. But, actually refinancing is done only for $10,000,000. Hence, current portion of loan is $2,000,000 ($12,000,000 – $10,000,000).