Goal:

To practice recording contingent liabilities and reporting them in the financial statements. $($See Topic Guides LE $4,7,8).$

Information:

On July $15,2022,$ PPI took out a special short$-$term note to finance the purchase of additional inventory needed for a large contract with a new client. The new, non$-$interest bearing loan was for $$800,000$ and must be repaid within $6$ months of issuance. After the loan paperwork was signed, the bank transferred $$736,000$ to PPI and the company was able to start purchasing the needed inventory.

While the purchase of inventory was properly recorded, no journal entries have yet been made for the note.

PPI's management would like to know the effect of your adjustment on the following ratios:

Current Ratio

Times Interest Earned $($Income before Interest and Taxes $/$ Interest Expense$)$

Assignment:

Calculations

Make the appropriate journal entries, if any, to account for the new note $($including any necessary changes to income tax expense$).$

Make any necessary changes to the financial statements.

Critical Thinking

$3.$ Calculate each of the required ratios using the original values $($before any changes$)$ and the updated values $($after your changes$).$

$4.$ PPI's finance team had several options to raise the funds for the needed inventory. They could have sold stock, issued a long$-$term note, purchased the inventory on credit, or issued other financing. How did their choice to issue a short$-$term note affect their financial position? Do you agree that this was the best of the available options? If so$,$ please explain why it was the best available option. If not, please explain which other option you feel would have been the best and why.

$5.$ PPI's Director of Finance argued that they should wait until they repaid the obligation to record the interest, after all it was technically a non$-$interest bearing note and the amount of interest was very small. What would have been the possible consequences of this option and who is likely to have been affected?

Hints:

When working on the Statement of Cash Flows, pay close attention to the actual cash amounts in your journal entries. The total change in cash should change by that amount. Any non$-$cash changes to NI will need to be removed from the CFO section to correctly make your statement to balance $($just like we remove Depreciation because it doesn't have a real cash effect$).$ When making those adjustments, the common line title when adjusting for amortized amounts is 'Amortization of You fill in the blank with whatever caused the amortization. Please write out all journal entries in excel file