CURRENT AND LONG-TERM LIABILITIES
In 2013 Crosson, Inc. engaged in the following transactions related to liabilities:
	1/2/13	Crosson, Inc. issued			$ 2,100,000	, 5-year bonds that have a contract interest rate of						4%	. The terms
		of the bonds require Crosson, Inc. to make semi-annual interest payments which are due on June 30th
		and December 31st of each year.				The bonds were sold at			101.75
	1/3/13	Crosson, Inc. signed a long-term note and borrowed cash of							$ 1,500,000	from New Zealand Bank. The
		loan has an annual interest rate of				2.5%	. The terms of repayment require 6 annual payments of principal
		and the appropriate interest on December 31st of each year as calculated in the schedule below:
			For the Year		N/P Balance		Total Annual		Interest		Decrease		N/P Balance
			Ending:		on Jan. 1		Payment		Expense		in N/P		on Dec. 31
			12/31/2013		1,500,000		272,300		37,500		234,800		1,265,200
			12/31/2014		1,265,200		272,300		31,630		240,670		1,024,530
			12/31/2015		1,024,530		272,300		25,613		246,687		777,843
			12/31/2016		777,843		272,300		19,446		252,854		524,989
			12/31/2017		524,989		272,300		13,125		259,175		265,814
			12/31/2018		265,814		272,459		6,645		265,814		0
	2/10/13	Crosson, Inc. paid			$ 3,000,000	cash to purchase new operating equipment.
	6/30/13	Crosson, Inc. made the semi-annual interest payment to its bondholders and recorded amortization.
	12/16/13	Crosson, Inc. signed a promissory note to Brand Bank in exchange for a cash loan of									$ 48,000
			The loan is for 45 days, and the annual interest rate to be paid is							2%	.
	12/31/13	Crosson, Inc. made the semi-annual interest payment to its bondholders and recorded amortization.
	12/31/13	Crosson, Inc. made the required annual payment on its note payable to New Zealand Bank.
	12/31/13	Crosson, Inc. recorded the adjustment necessary to accrue interest on the loan from Brand Bank.
Instructions:
1.	Using the general journal provided on the following page, prepare journal entries to record the above transactions associated
		with liabilities, (be sure to include correct dates and explanations, the income tax entry has been recorded).
2.	Using the t-account balances provided (which include the above journal entries), complete the attached financial statements.
3.	Answer questions a-k on the following page.

CURRENT AND LONG-TERM LIABILITIES

4.

Answer the following questions:

a.

When the bond payable was issued on 1/2/2013, what was the selling price?

b.

How much was the premium received by Crosson, Inc. from the sale of the bonds?

c.

What is the dollar amount of interest that MUST be paid every six months on the

bonds?

d.

What is the amount of the semiannual amortization of the premium on the bond?

e.

Will the semi-annual amortization of the premium cause the amount of the interest

expense recorded, when the interest is paid, to be more or less than the

actual cash that is paid for the semi-annual interest on the bond?

f.

Since the bonds sold at a premium on 1/2/2013, what do you know about the

market rate of interest on 1/2/2013?

g.

What will the carrying value of the bonds be on 12/31/13 (after the payment of the semi-annual interest)?

Bond face amount

Unamortized premium

Carrying value at 12/31/13

h.

If, after paying the interest on 12/31/13, Crosson, Inc. redeems the bonds early at

101.5

What is the redemption price of the bonds (i.e. cash paid to bondholders)?

Will there be a gain or loss on the redemption?

How much of a gain or loss will there be?

i.

On December 31, 2013, how much of the note payable still owed to New Zealand Bank

will be presented on the balance sheet as a current liability?

j.

Calculate the following for Crosson, Inc. on December 31, 2013:

Working capital

=

current assets - current liabilities

=

-

=

Current ratio

=

current assets

=

=

current liabilities

Quick ratio

=

quick assets

=

=

current liabilities

Number of Times Interest Charges

=

Income Before Income Tax + Interest Expense

Are Earned

Interest Expense

=

+

=

=

k.

What do the above ratios tell you about Crosson, Inc?

1.	RECORD JOURNAL ENTRIES
	LONG-TERM LIABILITIES
	CROSSON, INC.
	General Journal
	Date	Description				Post Ref	Debit	Credit
	12/31/13	Income Tax Expense					26,884
			Income Taxes Payable					26,884
		To accrue income taxes owed on net income = $76,801 x 35% = $26,884 (rounded to nearest whole dollar).

	2. UPDATED ACCOUNT BALANCES (You do NOT have to post your journal entries)!
	Crosson, Inc.
	General Ledger
	December 31, 2013 (excluding certain liabilities transactions)
		Cash #100				Short-Term Note Pay. #200				Note Pay.-Long Term #220				Deprec. Exp-Store #601
	Beg. Balance	30,100			Beg. Balance		0		Beg. Balance		0		Beg. Balance	0
	Annual activity	175,000	5,000		Annual activity		0		Annual activity		0		Annual activity	116,000
	subtotal	200,100			subtotal		0		subtotal		0		subtotal	116,000
	1/2/13	2,136,750			12/16/13		48,000		1/3/13		1,500,000
	1/3/13	1,500,000			Updated balance		48,000		12/31/13	234,800				Advertising Exp. #603
	2/10/13		3,000,000						Updated balance		1,265,200		Beg. Balance	0
	6/30/13		42,000			Accounts Payable #201							Annual activity	48,750
	12/16/13	48,000			Beg. Balance		74,350						subtotal	48,750
	12/31/13		42,000		Annual activity	1,955,500	1,900,000			Common Stock #300
	12/31/13		272,300		subtotal		18,850		Beg. Balance		600,000			Office Salaries Exp. #700
	Updated balance	528,550							Annual activity		50,000		Beg. Balance	0
						Interest Payable #202			subtotal		650,000		Annual activity	325,000
		Accounts Receivable #105			Beg. Balance		0						subtotal	325,000
	Beg. Balance	48,900			Annual activity		0			Retained Earnings #301
	Annual activity	2,750,000	2,735,500		subtotal		0		Beg. Balance		186,000			Office Rent Exp. #702
	subtotal	63,400			12/31/13		40		Annual activity		0		Beg. Balance	0
					Updated balance		40		subtotal		186,000		Annual activity	240,000
													subtotal	240,000
		Merch. Inventory #106				Income Taxes Pay. #203
	Beg. Balance	15,350			Beg. Balance		0			Dividends #302				Office Insurance Exp. #705
	Annual activity	1,475,000	1,445,000		Annual activity		0		Beg. Balance	0			Beg. Balance	0
	subtotal	45,350			subtotal		0		Annual activity	25,000			Annual activity	18,000
					12/31/13		26,884		subtotal	25,000			subtotal	18,000
					Updated balance		26,884
		Prepaid Office Ins. #107												Interest Expense #800
	Beg. Balance	36,000				Bonds Payable #210				Sales #400			Beg. Balance	0
	Annual activity		18,000		Beg. Balance		0		Beg. Balance		0		Annual activity	0
	subtotal	18,000			Annual activity		0		Annual activity		2,920,750		subtotal	0
					subtotal		0		subtotal		2,920,750		6/30/13	38,325
		Equipment #111			1/2/13		2,100,000						12/31/13	38,325
	Beg. Balance	830,000					2,100,000			Cost of Goods Sold #500			12/31/13	37,500
	Annual activity	80,000							Beg. Balance	0			12/31/13	40
	subtotal	910,000				Premium-Bonds Pay. #211			Annual activity	1,445,000			Updated balance	114,190
	2/10/13	3,000,000			Beg. Balance		0		subtotal	1,445,000
	Updated balance	3,910,000			Annual activity		0							Income Tax Exp. #810
					subtotal		0						Beg. Balance	0
		Accum. Deprec. #112			1/2/2013		36,750			Sales Salaries Exp. #600			Annual activity	0
	Beg. Balance		100,000		6/30/13	3,675			Beg. Balance	0			subtotal	0
	Annual activity		116,000		12/31/13	3,675			Annual activity	537,000			12/31/13	26,884
	subtotal		216,000		Updated balance		29,400		subtotal	537,000			Updated balance	26,884
	Jan.1			Subtotal					Updated
	Debits =	960,350			Debits =	3,991,600			Debits =	7,461,124
	Credits=	960,350			Credits=	3,991,600			Credits=	7,461,124