Question 1 During the fiscal year ended December 31, Swanson Corporation engaged in the following transactions involving notes payable:

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

Instructions

a. Prepare journal entries (in general journal form) to record the above transactions. Use a 360- day year in making the interest calculations.

b. Prepare the adjusting entry needed at December 31, prior to closing the accounts. Use one entry for all three notes (round to the nearest dollar).

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.

Question 2 The following items were taken from the accounting records of Nevada Utility Company for the year ended December 31, 2015 (dollar amounts are in thousands): Accounts payable $ 48,000.00

Accrued Expense Payable (other than interest) $ 7,200.00

10% Bonds Payable, due April 1, 2016 $ 100,000.00

8% Bonds payable, due October 1, 2016 $ 150,000.00

Unarmotized bond discount (8% bonds of 2016) $ 270.00

12% bonds payable, due April 1, 2030 $ 300,000.00

Unarmotized bond premium (12% bonds of 2030) $ 2,000.00

Accrued interest payable $ 3,650.00

Bond interest expense $ 57,000.00

Other intesrest expense $ 8,000.00

Notes payable (short-term) $ 75,000.00

Lease Obligations - Capital leases $ 18,000.00

Pension obligation $ 410,000.00

Unfunded obligation for postretirement benefits other than pensions $ 60,000.00

Deferred income taxes $ 110,000.00

income tax expense $ 42,000.00

Income tax Payable $ 8,000.00

Operating Income $ 341,250.00

Net Income $ 210,000.00

Total Assets $ 2,203,590.00

Other Information 1. The 10 percent bonds due in April 2016 will be refinanced in March 2016 through the issuance of $125,000 in 9 percent, 20-year bonds payable.

2. The 8 percent bonds due October 1, 2016, will be repaid entirely from a bond sinking fund.

3. Nevada Utility is committed to total lease payments of $11,000 in 2016. Of this amount, $6,000 is applicable to operating leases, and $5,000 to capital leases. Payments on capital leases will be applied as follows: $2,000 to interest expense and $3,000 to reduction in the capitalized lease payment obligation.

4. Nevada Utilitys pension plan is fully funded with an independent trustee.

5. The obligation for postretirement benefits other than pensions consists of a commitment to maintain health insurance for retired workers. During 2016, Nevada Utility will fund $16,000 of this obligation.

6. The $8,000 in income taxes payable relates to income taxes levied in 2015 and must be paid on or before March 15, 2016. No portion of the deferred tax liability is regarded as a current liability.

Instructions

a. Using this information, prepare the current liabilities and long-term liabilities sections of Nevada Utility Companys classified balance sheet as of December 31, 2015. (Within each classification, items may be listed in any order.)

b. Explain briefly how the information in each of the six numbered paragraphs affected your presentation of the companys liabilities.

c. Compute as of December 31, 2015, the companys (1) debt ratio and (2) interest coverage ratio. d. Solely on the basis of information stated in this problem, indicate whether this company appears to be an outstanding, medium, or poor long-term credit risk. State specific reasons for your conclusion