Tuesday Morning Corporation operates a chain of discount retail stores. The Company purchases closeout merchandise at prices generally ranging from 10% to 50% of the normal wholesale price and sells the merchandise at prices that are 50% to 80% lower than retail prices generally charged by department and specialty stores.
The following is information taken from a recent Tuesday Morning annual report.

In connection with these mortgages, the Company is required to maintain minimum net worth and comply with other financial covenants, including a restriction limiting loans to officers to less than $2,000,000. At December 31, Year 2, the Company is in compliance with these covenants.
The $1,794,000 note payable to bank due on April 30, Year 3, is classified as a current liability at December 31, Year 2. The aggregate maturities of mortgages are as follows ($ in thousands):

Required:
1. What was the current portion of Tuesday Morning€™s mortgage payable at the end of Year 1?
2. How much did Tuesday Morning pay in cash to reduce its mortgage payable during Year 2?
3. Explain the difference between your answer to requirement I and your answer to requirement 2.
4. What are the components of the current portion of the mortgage payable as of the end of Year 2?
5. Assume that the next quarterly installment on the industrial development bond is due on March 31, Year 3. Prepare a journal entry to record the installment payment and any interest. Assume that the effective interest rate for the bond is 14% per year.
6. The company has a mortgage note payable for $1,794,000 that comes due on April 30, Year 3. Suppose that this note is paid by the signing of a new 14% note for the amount due, Prepare the April 30, Year 3, journal entry to record this refinancing of the old note.
7. Instead of refinancing the note, suppose the company pays the principal along with any remaining interest on April 30, Year 3. Prepare a journal entry to record this cashpayment.

Transcribed Image Text:

Note 5: Mortgages on Property, Plant, and Equipment Year 2 Year $ in thousands) Industrial development bond, payable in quarterly installments of S108 plus interest at 91.656% of prime (not to exceed 1 5%), maturing March 31, Year 6 $1,40 $1,834 Payable to bank, payable in quarterly installments of $104 plus interest at LIBOR plus 2.50%, maturing September 30, Year 5, with remaining principal due at that time 4,504 Payable to bank, payable in quarterly installments of $112 plus interest at LIBOR plus 2.50% through October 15, Year 2, with the remaining principal and interest due April 30, Year 3 1,794 2,243 Year Amount ear ear ear ear $2,747 849 4.003 100 Consolidated Balance Sheet in thousands Year 2 Year l Current liabilities: 2,747 607 12,916 1,574 1,945 303 S 1,402 Current installments on mortgages Current installments on capital lease obligation Accounts payable Accrued sales tax Other accrued expenses Deferred income taxes Due to officer Income taxes payable 15,859 1,760 3,118 146 599 988 $21,080 Total current liabilities $22,884 Consolidated Statement of Cash Flows Year 2 Year I ($ in thousands) Cash flows from financing activities: (3,500) (1,194) Net increase (decrease) in notes payable Principal payments on mortgages Principal payments under capital lease obligation Proceeds from common stock offering Proceeds from exercise of common stock options Repurchase of common stock S-0 (1,298) (214) -0 255 -0 145 3,383) Net cash provided by (used in) financing activities