Exercise 1:

During the fiscal year ended December 31, 2017, Swanson Corporation engaged in the following transactions involving notes payable:

Aug. 6 Borrowed $12,000 from Maple Grove Bank, signing a 45-day, 12%

note payable.

Sept. 16 Purchased office equipment from Seawald Equipment. The invoice amount was $18,000, and Seawald agreed to accept, as full payment a 10 percent, three-month note for the invoice amount.

Sept. 20 Paid Maple Grove Bank the note plus accrued interest.

Nov. 1 Borrowed $250,000 from Mike Swanson, a major corporate stockholder. The corporation issued Swanson a $250,000, 15 percent, 90-day note payable.

Dec. 1 Purchased merchandise inventory in the amount of $5,000 from Gathman Corporation. Gathman accepted a 90-day, 14 percent note as full settlement of the purchase. Swanson Corporation uses a perpetual inventory system.

Dec. 16 The $18,000 note payable to Seawald Equipment matures today. Swanson paid the accrued interest on this note and issued a new 30-day, 16 percent note payable in the amount of $18,000 to replace the note that matured.

a. Prepare journal entries to record each of the above transactions. Use a 360-day year in making the interest calculations.

b. Prepare the adjusting entry needed at December 31 to accrue interest.

c. Provide a possible explanation why the new 30-day note payable to Seawald Equipment pays 16 percent interest instead of the 10 percent rate charged on the September 16 note.

Exercise 2

On January 1, 2017, Park Rapids Lumber Company issued $80 million in 20-year, 10% bonds payable. Interest is payable semiannually on June 30th and December 31st. Bond discounts and premiums are amortized straight-line at each interest payment date.

a. Record the journal entry when the bonds were issued on January 1, 2017, make the necessary the journal entry to record the payment of bond interest on June 30, 2017, under each of the following assumptions:

1. The bonds were issued at 98. Round your answers to the nearest dollar.

2. The bonds were issued at 101. Round your answers to the nearest dollar.

b. Compute the net bond liability at December 31, 2017, under assumptions 1 and 2 above. Round to the nearest dollar.

c. Under which of the above assumptions, 1 or 2 would the investors effective rate of interest be higher? Explain.

Exercise 3

Speed World Cycles sells high-performance motorcycles and Motocross racers. One of Speed Worlds most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs:

Purchase Date Units Purchased Unit Cost Total Cost

July 1 2 $4,950 $9,900

July 22 3 5,000 15,000

August 3 3 5,100 15,300

------ ------------

8 $40,200

On July 28, Speed World sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed Worlds fiscal year.

Assume that Speed World uses a perpetual inventory system.

a. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using the following cost flow assumptions:

1. Average cost

2. FIFO

3. LIFO

Show the number of units and the unit costs of each layer comprising the cost of goods sold and ending inventory.

b. Using the cost figures computed in part a. answer the following questions:

1. Which of the three cost flow assumptions will result in Speed World Cycles reporting the highest net income for the current year? Would this always be the case? Explain.

2. Which of the three cost flow assumptions will minimize the income taxes owed by Speed World Cycles for the year? Would you expect this usually to be the case? Explain.

3. May Speed World Cycles use the cost flow assumption that results in the highest net income for the current year in its financial statements, but use the cost flow assumption that minimizes taxable income for the current year in its income tax return? Explain.