Problem 7-1

Recording Purchases

Samuel Company recordsits purchases t gross amounts but wishes to change to recording

purchases net of purchase discounts.Discounts on purchases recorded from January 1,2019 to

December31, 2019, totaled $80,000.Of this amount, $8,000 is still available in the accounts payable

balance.The balances in Samuel Company's accounts as of and for the year ended December 31,

2019 before conversion are:

Purchases $4,000,000

Purchase discounts 32,000

Accounts payable 1,200,000

Required:

1. How much is the amount of purchase discount lost to be recognized?

2. The accounts payable balance should by reduced by how much?

3. The purchases account should be reduced by how much?

4. What is the journal entry to record the conversion?

Problem 7-2

NonInterest-Bearing Note

On December 31, 2019, Columbia Company acquired a machine from Georgia Company by issuing

a $4,000,000 noninterest-bearing note, payable in full on December 31, 2023.Columbia Company's

credit rating permits it to borrow funds from its several lines of credit at 12%.The machine is

expected to have a 10-year life and a $500,000 salvage value.The present value factor of an annuity

of 1 for 4 periods at 12% is 3.03735.The present value of 1 for 4 periods at 12% is 0.63552.

Required:

1. What is the journal entry to record the purchase on December 31, 2019?

2. What is the entry to record the discount amortization at December 31, 2021?

Problem 7-3

Premiums

Andreas Company sold 700,000 boxes of cake mix under a new sales promotional program.Each

box contains one coupon, which if submitted with $40, entitles the customer to a kitchen knife.

Andreas Company pays $60 per knife and $5 for handling and shipping.Andreas Company estimates

that 70% of the coupons will be redeemed, even though only 250,000 coupons had been processed

during 2019.

Required:

Determine the amount of liability for unredeemed coupons at December 31, 2019.

Problem 7-4

Short-term Refinanciing

The following items are based on the financial statements of Malcolm Company:

Current assets $750,000

Short-term loan payable 600,000

Total liabilities 3,000,000

Current ratio 1.5

Debt-to-equity ratio 1.5

MalcolmCompany has arranged with its bank to refinance its short-term loan when it becomes due in

3 months.The new loan will have a term of 5 years.

Required:

1. Compute the following:

a.Total current liabilities

b.Total shareholders' Equity

c.Total non-current liabilities

2. As the auditor of Malcolm Company, how would you verify the validity of the short-term loan

refinancing?

Problem 7-5

Debt Restructuring:Asset Swap

Colorado Company owes $1,998,000 to London Company.The debts is a 10-year, 11% note.

Because Colorado company isfinancial trouble, London Company agrees to accept land and cancel

the entire debt.The land has a book value of $800,000 and a fair market value of $1,200,000.

Required:

What entry should be made by Colorado company for debt restructure?

Problem 7-6

Convertible Bonds

AngelesCorporation issued$2,000,000 of convertible 10-year, 11% bonds on July 1, 2019. The interest

is payable semiannually on January 1 and July 1.The discount in connection with the issues was

$19,000, which is amortized monthly using the straight line basis.The debentures are convertible after

1 year into 10 shares of the company's $10 par ordinary shares for each $1,000 bonds.

On August 1, 2020, $200,000 of the bonds were converted.Any interest accrued at the time of

conversion of the bonds is paid in cash.

Required:

What is the journal entry to record the conversion of bonds on August 1?

Problem 7-7

Sale Between Interest Dates, Conversion, and Retirement of Bonds

On April 1, 2009, Finland Company issued $4,000,000 of 7% convertible bonds with interest payment

dates of April 1 and October 1.The bonds were sold on July 1, 2009, and mature on April 1, 2029.

The bond discount totaled $213,300.The bond contract entitles the bond holders to receive 10 shares

of $20 par value ordinary shares in exchange for each $1,000 bond.On April 1, 2019, the holders of

bonds with total face value of $500,000 exercise their conversion privilege.On July 1, 2019, Finland

Company reacquired bonds, face value $250,000.

The balances in the capital accounts as of December 31, 2018 were:

Ordinary shares, $20 par, authorized 2,000,000 shares

issued and outstanding, 125,000 shares $2,500,000

Share premium 1,250,000

Market value of ordinary shares and bonds were as follows:

Date Bonds Ordinary Shares

April 1, 2019 122 52

July 1, 2019 125 56

Required:

Prepare journal entries on the issuer's books for each of the following transactions.(Use the

straight-line amortization method for the bond discount)

1, Sale of the bonds on July 1, 2009.

2. Interest payment on October 1, 2009.

3. Interest accrual on December 31, 2009.

4. Bond discount amortization on December 31, 2009.

5. conversion of bonds on April 1, 2019.

6. Reacquisition and retirement of bonds on July , 2019 at 125 plus accrued interest.

Problem 7-8

Liability Under Finance Lease

Jamaica Company enters into a lease agreement with Lebanon Corporation on July 1,2019 to lease

a machine to be used in its manufacturing operations.

The following data pertain to this agreement:

1. The term of the noncancellable lease is 3 years, with no renewal option and no residual value

at the end of the lease term.Payments of $212, 024 are due on July 1 of each year, beginning

July 1, 2019.

2. The fair value of the machine on July 1, 2019 is $620,000.The machine has a remaining life of

5 years, with no salvage value.The machine reverts to the lessor upon the termination of the

lease.

3. Jamaica company elects to depreciate the machine on the straight-line method.

4. The interest rate implicit in the lease is 10%.

6. The present value factor of an ordinary annuity of 1 for 3 periods at 10% per year is 2.48685.The

present value factor of an annuity due of 1 for 3 periods at 10% is 2.73554.

Required:

Determine the amount of lease liability to be recognized by Jamaica Company at the beginning

of the lease contract.

Problem 7-9

Warranties

Barbados Company, a machinery dealer, sells a machine for $22,000 under a 1-year warranty contract

that requires the company to replace all defective parts and to provide the necessary repair labor at

no cost to the customers.With sales being made evenly throughout the year, Barbados company

sells for cash 600 machines in 2019 (half of the warranty expense is incurred in 2019, half in 2020).On

the basis of past experience, the 1-year warranty costs are estimated to be $510 parts and $660

labor.

Required:

Assume that in 2019, these warranty costs are incurred exactly as estimated:

a. What amount of warranty expense would be charged against 2019 revenue?

b. What amount of warranty liability would appear on the December 31, 2019 statement of

financial position?

Problem 7-10

Analyzing Various Transactions Involving Liabilities

In conjunction with your firm's examination of the financial statements of Batam Company as of

December 41, 2019, you obtained the information from the company's voucher register shown in

the working paper below:

Item No. Entry Date Voucher Reference Description Amount Account Charge

1. 12/18/19 12-200 Supplies, shipped FOB Destination Supplies on

12/15/19; received 12/17/19 $15,000 Hand

2. 12/18/19 12-203 Auto insurance, 12/15/19 -12/15/20 22,000 Prepaid

Insurance

3. 12/21/19 12-209 Repairs services; received 19,000 Repairs and

12/20/19 maintenance

4. 12/26/19 12-212 Merchandise, shipped FOB

shipping point, 12/20/19;

received 12/24/19 123,000 Inventory

5. 12/21/19 12-210 Payroll, 12/7/19 - 12/21/19 Salaries and

(12 working days) 69,000 wages

6. 12/21/19 12-234 Subscription to industry Dues and

magazine for 2020 5,000 subscription exp.

7. 12/28/19 12-236 Utilities for December 2019 24,000 Utilities Expense

8. 12/28/19 12-241 Merchandise, shipped FOB

destination, 12/24/19; received

1/2/20 111,500 Inventory

9. 12/28/19 12-242 Merchandise, shipped FOB

destination, 12/24/19; received

1/2/20 84,000 Inventory

10. 1/2/20 1-1 Legal service, received 12/28/20 46,000 Legal and

professional

fees expense

11. 1/2/20 1-2 Medical services for employees

for December 2019 25,000 Medical expense

12. 1/5/20 1-3 Merchandise, shipped FOB

shipping point, 12/29/19; received

1/4/20 55,000 Inventory

13. 1/10/20 1-4 Payroll, 12/21/19 - 1/5/20 (12

working days in total,4 working Salaries and

days in January 2020) 72,000 wages

14. 1/10/20 1-6 Merchandise, shipped FOB

shipping point, 1/2/20; received

1/6/20 64,000 Inventory

15. 1/12/20 1-8 Merchandise, shipped FOB

destination, 1/3/20; received

1/10/20 38,000 Inventory

16 1/13/20 1-9 Maintenance service, received Repairs and

1/9/20 9,000 maintenance

17. 1/14/120 1-10 Interest on bank loan, Interest

10/10/19 - 1/10/20 30,000 Expense

18. 1/15/20 1-11 Manufacturing equipment, Machinery and

installed 12/29/19 254,000 Equipment

19. 1/15'20 1-12 Dividends declared, 12/15/19 160,000 Dividends

payable

Accrued liabilities as of December 31, 2019 were as follows:

Accrued payroll $48,000

Accrued interest payable 26,666

Dividends payable 160,000

The accrued payroll and accrued interest payable were reversed affective January 1, 2020.

Required:

Review the data given above and prepare journal entries to adjust the accounts on December 31,

2019.Assume that the company follows FOB terms for recording inventory purchases.

Problem 7-11

Bond Redemption Prior to Maturity Date

The following data were obtained from the initial audit of Hongkong Company:

15 %, 10-year, Bonds Payable, dated January 1, 2018:

Description Debit Credit Balance

Cash proceeds from issue on January 1, 2018, of

1,000 bonds.The market rate of interest on the

date of issue was 12% $1,172,044 $1,172,044

Bond interest expense

Cash paid, 1/2/19 $75,000 $75,000

Cash paid, 7/1/19 75,000 75,000

Accrual, 12/31/19 75,000 75,000

Accrued Interest on Bonds

Balance, 1/1/19 $75,000 $75,000

Accrual, 12/31/19 75,000 75,000

Treasury Bonds

Redemption price and interest to date on 200 bonds

permanently retired on December 31, 2019 $265,000 $265,000

Required:

Based on the preceding information, determine the following:

1. Carrying value of bonds payable at December 31, 2019.

2. Gain or loss on bond redemption.

3. Accrued interest on bonds at December 31, 2019.

4. Bond interest expense for the year ended December 31, 2019.