Demonstration Problem 9-1 - Computing Accrued Interest

Johnson Company borrowed $1,000 cash by issuing a one-year note payable to McCoy Company. McCoy charged Johnson interest on the note at a 12% annual rate. Both companies close their books on December 31, Year 1.

Required

Determine the amount of accrued interest expense Johnson would report and the amount of accrued interest revenue McCoy would report at December 31, Year 1 under each of the three following independent assumptions of the note issue date. The note was issued (money was borrowed) on (1) April 1, Year 1; (2) June 1, Year 1; and (3) October 1, Year 1.

Demonstration Problem 9-2 - Accounting for Notes Payable

Frank's Hot Dogs (FHD) experienced the following transactions during Year 1.

1.FHD was started on March 1, Year 1 when it borrowed $10,000 from City Bank.

2.Earned $5,000 of cash revenue.

3.Incurred $2,000 of cash expenses.

4.Accrued interest expense on the note issued in Event 1. The note had a 6% annual interest rate and was to be repaid on March 1, Year 2.

Frank's Hot Dogs (FHD) experienced the following transactions during Year 2.

1.Earned $5,000 of cash revenue.

2.Incurred $2,000 of cash expenses.

3.Accrued interest expense on the note issued in Event 1. The note had a 6% annual interest rate and was to be repaid on March 1, Year 2.

4.FHD paid the interest due on March 1 Year 2.

5.FHD paid off the $10,000 principal balance of note payable on March 1, Year 2.

Required

a.Record the transactions for Year 1 and Year 2 using the horizontal financial statements model. Record the amounts under the appropriate heading and the initials "NA" under each heading not affected by the event.

b.What is the amount of interest expense recognized in Year 1 and Year 2?

c.What is the amount of cash flow from operating activities that is associated with interest in Year 1 and Year 2.

Demonstration Problem 9-3 - Accounting for Sales Tax

The following transaction apply to Dance Costumes Inc. (DCI).

1.During April DCI had total sales $10,000 plus sales tax of 4.5%. Assume the beginning balance in the sales tax payable account is zero.

2.During May DCI paid the tax due on April sales.

3.During May DCI had total sales (including sales tax) of $12,000. The sales tax rate is 4.5%.

Required:

a.Use a horizontal financial statements model to show how the three events affected DCI's financial statements. Record the amounts under the appropriate heading and the initials "NA" under each heading not affected by the event.

b.What is the cash flow for sales tax in May?

c.What is the amount of sales tax expense in May?

d.What is the amount of sales tax payable at the end of May?

Demonstration Problem 9-4 - Accounting for Warranties

Versa Training Services provides instruction on how to pass the CPA examination. Versa has attained phenomenal growth by offering its customers a money-back guarantee. Any student who attends all classes and completes all homework assignments is entitled to a complete refund if he or she fails to pass the exam. The following events pertain to a new course that was recently established by Versa.

1.During Year 1, Versa charged a total of 40 students $400 each for the training. Versa only accepts cash payment for training.

2.Versa estimates that 10 percent of the students will attend all the classes, complete all the homework assignments, and yet fail the exam and demand a cash refund.

3.During Year 1, only 1 customer presented his exam results to Versa and requested a cash refund. Versa paid a $400 cash refund to a customer after he received his exam results. This refund was the first of several Versa expected to grant to unsuccessful candidates.

Required

Use a horizontal financial statements model to show how the three events affected Versa's financial statements. Record the amounts under the appropriate heading and the initials "NA" under each heading not affected by the event.