Deck 7: Non-Current Liabilities

Question 1

Chanti Limited issued $ 200,000, 6%, 10-year bonds on December 31, 2021, for $ 190,000. Interest is payable semi-annually on June 30 and December 31. Chanti has a December 31 year end. Amortization for the first semi-annual interest period is $ 360.
Instructions
Prepare the appropriate journal entries on
a) December 31, 2021.
b) June 30, 2022.

Answer 1

Question 2

Three plans for financing a $ 20,000,000 corporation are under consideration by its organizers. The bonds will be issued at their face value and the income tax rate is estimated at 20%. It is estimated that profit before interest and taxes will be $ 4,000,000.
Instructions
For each plan, determine the expected profit and the earnings per share. Prior to obtaining financing, there are no common shares outstanding.

Answer 2

Question 3

On September 1, 2021, Bear Corporation issued $ 1,000,000, 6%, 10-year bonds. Interest is payable annually with the first payment due on September 1, 2022.
Instructions
a) For each of the following market rate assumptions, identify whether Bear would issue the bonds at face value, at a discount, or at a premium: (1) 5%, (2) 6%, and (3) 7%.
b) Provide the appropriate journal entry on September 1, 2021 to record the issuance of the bonds if the market rate of interest is 7%. Round your answer to the nearest dollar.
c) Assuming Bear has a December 31 year end, prepare the year-end adjusting entry to account for accrued interest on the bonds.

Answer 3

Question 4

Jashanpreet Industries Limited (JIL) issued $ 1,800,000, 8%, 20-year bonds on January 1, 2021 and received proceeds of $ 2,200,000. Interest is payable semi-annually on July 1 and January 1. JIL's year-end is December 31. Assume the market rate for similar bonds is 6%.
Instructions
a) Prepare all necessary journal entries for JIL during 2021.
b) Prepare a partial balance sheet for TIL on December 31, 2021, showing all areas affected by this bond transaction.

Question 5

The board of directors of Bobcat Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issue of $ 4,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issue of 200,000 common shares for $ 20 per share. Bobcat Corporation currently has 100,000 common shares issued at a book value of $ 20 each and retained earnings of $ 750,000. The income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $ 800,000 if the new factory equipment is purchased. Assume that the debt or equity will be issued at the beginning of the year.
Instructions
a) Prepare a schedule that shows the expected profit, earnings per share, and return on equity (using year-end balances) under each of the plans that the board of directors is considering.
b) If the board of directors' stated goal is to maximize the common shareholders' return, which alternative is preferable? If the board's stated goal is to maximize solvency, which alternative is preferable?

Question 6

Moxy's Restaurant Supplies Ltd. issued $ 1,800,000, 7%, 10-year bonds on January 1, 2021. Interest is payable semi-annually on July 1 and January 1. Moxy's year-end is December 31. Assume the market rate for similar bonds is 8%. (Use the following present value factors: present value of $ 1 = 0.45639; present value of annuity = 13.59033)
Instructions
Prepare all necessary journal entries (rounding to the nearest dollar) for Moxy's on the following dates:
a) January 1, 2021.
b) July 1, 2021.
c) December 31, 2021.
d) January 1, 2022.

Question 7

On January 1, 2021, Duck Work Corporation issued $ 900,000, 8%, 10-year bonds at face value. Interest is payable semi-annually on July 1 and January 1. Duck Work Corporation has a calendar year end.
Instructions
Prepare all entries related to the bond issue for 2021.

Question 8

On June 30, 2021, Gorgeous Inc. sold $ 1,200,000 (face value) of bonds. The bonds are dated June 30, 2021, pay interest semi-annually on December 31 and June 30, and will mature on June 30, 2024. The following schedule was prepared by the accountant for 2021: Instructions
On the basis of the above information, answer the following questions. (Round your answer to the nearest dollar or percent.)
a) What is the contractual rate of interest for this bond issue?
b) What is the market rate of interest for this bond issue?
c) What was the selling price of the bonds as a percentage of the face value?
d) Prepare the journal entry to record the sale of the bond issue on June 30, 2021.
e) Prepare the journal entry to record the payment of interest and amortization on December 31, 2021.

Question 9

Prairie Corporation issued $ 100,000 of 10-year, 6% bonds payable on January 1, 2021 for $ 92,900, at a time when market interest rates were 7%. Interest is payable semi-annually on June 30 and December 31. On January 1, 2022, 20% of the bonds were redeemed at 101. Prairie has a December 31 year end and uses the effective-interest method in accounting for bonds payable.
Instructions
a) Record the issue of the bonds on January 1, 2021.
b) Record the payment of interest on June 30 and December 31, 2021.
c) Show how the bonds would be reported on Prairie's December 31, 2021 balance sheet.
d) Record the redemption of the bonds on January 1, 2022.

Question 10

On January 1, 2021, Wallgrub Wholesale Ltd. issued $ 500,000 of 10-year, 6% bonds payable at 99. Interest is payable semi-annually on June 30 and December 31. Semi-annual amortization for this bond is $ 250.
Instructions
a) Record all entries required for this bond during 2021.
b) Show how the bonds would be reported on Wallgrub's December 31, 2021 balance sheet.

Question 11

On January 1, 2021, Dino Corporation issued $ 300,000, 5%, 10-year bonds dated January 1, 2021, to yield 4%. The bonds pay semi-annual interest on January 1 and July 1.
Instructions
Calculate the selling price of the bonds and prepare the journal entry to record the issue of the bonds.

Question 12

On January 1, 2021, Kramer International Inc. issued $ 200,000, 9%, 5-year bonds for $ 192,278. The bonds were sold to yield an effective interest rate of 10%. Interest is paid semi-annually on June 30 and December 31. The company uses the effective-interest method of amortization.
Instructions
a) Prepare a bond discount amortization schedule that shows the amortization of the discount for the first two interest payment dates. (Round to the nearest dollar.)
b) Prepare the journal entries that Kramer International would make on January 1, June 30, and December 31, 2021, related to the bond issue.

Question 13

United Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:

Question 14

On February 1, 2021, Mary Miles Corporation issued $ 100,000, 5%, 5-year bonds. Interest is payable semi-annually on August 1 and February 1.
Instructions
a) Prepare the journal entries that Mary Miles would make on February 1 if it issued the bonds at (1) 100, (2) 98, and (3) 102.
a)?
b) How much interest would Mary Miles Corporation pay on August 1, 2021 under each of the three issue prices listed in

Question 15

On September 1, 2021, Imperial Corporation issued $ 1,000,000, 6%, 10-year bonds. Interest is payable annually with the first payment due on September 1, 2022.
Instructions
a) Provide the appropriate journal entry on September 1, 2021 to record the issuance of the bonds if the market rate of interest is 5%. Round your answer to the nearest dollar.
b) Assuming Imperial has a December 31 year end, prepare the 2021 year-end adjusting entry to account for accrued interest on the bonds. Round your answer to the nearest dollar.
c) Prepare a partial balance sheet at December 31, 2021 for Imperial Corporation displaying all amounts related to the bonds.
d) Prepare the journal entry on September 1, 2022 to record the first interest payment.
e) Assume the bonds were redeemed for $ 1,050,000 at September 30, 2024 when the amortized cost was $ 1,035,000. Record the redemption of the bonds.

Question 16

On January 1, 2021, Golf Corporation issued $ 900,000, 8%, 5-year bonds dated January 1, 2021, to yield 9%. The bonds pay semi-annual interest on January 1 and July 1. The company has a December 31 year end.
Instructions
a) Calculate the selling price of the bond (round final answer to the nearest $ 1,000).
b) Prepare all the journal entries that Golf Corporation would make related to this bond issue from issue date through to January 1, 2022.

Question 17

Swan Diver Inc. issued $ 400,000 of 20-year, 5% bonds payable on July 1, 2021 providing an effective-interest rate of 4.75%, for proceeds of $ 412,820. Interest is payable semi-annually on December 31 and June 30. Swan Diver's year end is June 30 and the effective-interest method is used in accounting for bonds payable.
Instructions
a) Record the issuing of the bonds on July 1, 2021.
b) Prepare an amortization table for the first year (two payments).
c) Record the payments on December 31, 2021 and June 30, 2022.
d) Show how the bond payable would be presented on Swan Diver's June 30, 2022 balance sheet.

Question 18

Numbered Company Inc. issued $ 600,000, 6%, 20-year bonds on January 1, 2021, at 102. Interest is payable semi-annually on July 1 and January 1. Numbered Company has a December 31 year end. Assume amortization of $ 250 and $ 260, respectively for the first two semi-annual interest periods.
Instructions
Prepare all journal entries made in 2021 related to the bond issue.

Question 19

On September 1, 2021, Guss Corporation issued $ 1,000,000, 6%, 10-year bonds. Interest is payable annually with the first payment due on September 1, 2022.
Instructions
Prepare the appropriate journal entry to record the bond issuance on September 1, 2021 under each of the following market rate assumptions:
a) 6%,
b) 5%, and
c) 7%. Round answers to the nearest dollar.

Question 20

Southern Merchandising Inc. is considering new financing to pay out $ 2,500,000 of existing 10% bonds payable at the beginning of the next fiscal year. The company wants to maximize ROE in the new year. They are considering three alternatives of dealing with the matter:
1. Do not pay out the existing bonds;
2. Issue a 5% bond payable at face value of $ 2,500,000, or issue 250,000 common shares at $ 10.
Other information about Southern:
-Southern's tax rate is 25%.
-Southern currently has $ 4,000,000 in shareholders' equity prior to any new share issue.
-Southern's average profit before financing costs and taxes is $ 800,000.
-A one-time penalty of $ 150,000 will be incurred to pay out the 10% bonds early, which is fully tax deductible.
Instructions
Calculate the following amounts for Southern, compare all three alternatives, and make a recommendation, assuming the goal is to maximize return on equity for the next year.

Question 21

Millet Sales Corp., a public company, is planning to acquire new computers with a total value of $ 60,000 on January 1, 2021. They have a choice of leasing the computers for a three-year period, or purchasing them and financing the purchase by issuing a note payable. Details of the two alternative arrangements are as follows:
Lease option: Three annual lease payments of $ 22,446 due on December 31 of each year. Millet would purchase the computers at the end of the three years for $ 2.00.
Financing option: Millet would make a down payment of $ 10,000 and issue a 6%, 3-year note payable for the remaining balance, with annual blended payments of $ 18,705 required on December 31 of each year.
Instructions
a) Is the lease arrangement an operating or finance lease? Explain your choice. Record any entry required on January 1, 2021.
b) Prepare the amortization table for the note payable. Record any entry required on January 1, 2021.

Question 22

The following is a summarized balance sheet of Falcon Corporation at December 31, 2021. All amounts are in $ 000's. Falcon requires additional financing of $ 5,000,000 to finance an expansion of its business. The two choices are:
Alternative 1: Issue a 20-year, $ 5,000,000 5% bond payable at face value.
Alternative 2: Issue 250,000 common shares at $ 20 each.
In Falcon's industry, a safe debt to total assets ratio is considered to be between 50% and 60%. Falcon's board of directors is risk adverse. Assume that the financing is made at the beginning of the year.
Instructions
a) Calculate the debt to total assets ratio under the two proposed financing methods.
b) Make a recommendation to Falcon on the better financing alternative and explain your choice.

Question 23

Presented below are three different aircraft lease transactions that occurred for Canada Airways in 2021. All the leases start on January 1, 2021. In no case does Canada receive title to the aircraft during or at the end of the lease period. Canada Airways is a public company. Instructions
Which of the above leases are operating leases and which are finance leases? Explain your answer.

Question 24

Presented below are two independent situations:
a) On December 31, 2021, Legault Corporation had $ 1,000,000, 8% bonds payable issued. The bonds pay interest on January 1 and June 1 of each year, and mature on January 1, 2021. On January 2, 2022, Legault redeemed 60% of these bonds at 101. The amortized cost of the entire bond issue on the retirement date was $ 1,026,000. The interest payment due on January 1, 2022, has been made and recorded.
b) Antonio Inc. redeemed $ 500,000 of its bonds at 98 on December 31, 2021. The amortized cost of the bonds on the retirement date was $ 497,500. The bonds pay semi-annual interest and the interest payment due on December 31, 2021, has been made and recorded.
Instructions
For each of the independent situations, prepare the journal entry to record the retirement of the bonds.

Question 25

Lance Corporation, a public corporation, entered into the following transactions:
1. On January 1, 2021, Gagne Car Rental leased a car to Lance Corporation for one year. Terms of the operating lease call for monthly payments of $ 550.
2. On January 1, 2021, Lance Corporation entered into an agreement to lease 20 machines with a fair market value of $ 160,000 from Wells Corporation. The terms of the lease agreement require an initial payment of $ 50,000 and then three annual rental payments of $ 60,000 beginning on December 31, 2021. The present value of the three rental payments is $ 149,211.
Instructions
a) Identify each lease as either operating or finance.
b) Prepare the appropriate journal entries to be made by Lance Corporation on January 1 related to the lease transactions.

Question 26

Hanna Manufacturing Limited receives $ 240,000 on January 1, 2021 when it issues a 6%, 3-year note payable to finance the purchase of equipment. The terms provide for annual payments each December 31. The first payment is due December 31, 2021.
Instructions
Prepare the journal entries to record the note and the first two instalment payments assuming:
a) the payment is a fixed principal payment of $ 80,000.
b) the payment is a blended payment of $ 89,786.76.

Question 27

Kemba Corporation has acquired equipment on January 1, 2021 by engaging in a 5-year lease transaction that requires annual lease payments of $ 24,000 beginning January 1, 2021.
Instructions
Prepare the journal entries to record the lease inception at January 1, 2021 assuming:
a) The lease is classified as an operating lease.
b) The lease is classified as a finance lease and the present value of the minimal lease payments has been determined to be $ 100,077.

Question 28

Knowhere Corporation issues a $ 350,000, 4%, 20-year mortgage note payable on December 31, 2021, to obtain needed financing for the construction of a building addition. The terms provide for semi-annual blended payments of $ 12,795 on June 30 and December 31.
Instructions
a) Prepare the journal entries to record the mortgage loan on December 31, 2021, and the first instalment payment.
b) Will the amount of principal reduction in the second instalment payment be more or less than with the first instalment payment?

Question 29

Windemere Merchandising Corp., a public company, provides automobiles for its sales agents. The typical automobile has a retail value of $ 40,000 and in the past Windemere has purchased the automobiles, paying 10% on the financing. Now Windemere is considering leasing the automobiles instead, and has been offered one of two alternative lease arrangements. The lease arrangements would begin on June 1, 2021.
Alternative 1:
The automobile is leased for $ 320 per month on a one-year term, with renewal possible for a second year on similar terms. Each month's lease payment is due at the beginning of the month.
Alternative 2:
The automobile is leased for 5 years (60 months) with a $ 5,000 down payment and monthly payments of $ 675 due on the last day of each month. At the end of the 60 months, Windemere would have the option of purchasing the automobile for $ 1.
Instructions
a) For Alternative 1, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2021.
b) For Alternative 2, indicate whether the lease is operating or finance and explain why. Record any entry required on June 1, 2021.

Question 30

Novacore Manufacturing Inc. intends to finance the acquisition of new manufacturing equipment that costs $ 150,000 by issuing a 5-year, 3.5% note payable. The note would be issued on January 1, 2021. Novacore's year end is December and the note would require annual payments on December 31. The finance company has given Novacore the choice of making blended payments of $ 33,222, or making fixed payments of $ 30,000 plus interest.
Instructions
a) Assuming the blended payment option is selected; prepare the amortization table for the first two years of the note payable. Record the issue of the note and the December 31, 2021 payment under this alternative.
b) Assuming the fixed principal payment option is selected; prepare the amortization table for the first two years of the note payable. Record the December 31, 2021 payment under this alternative.

Question 31

Presented below are two independent situations:
a) Hillman Corporation redeemed $ 150,000 of its bonds on June 30, 2021, at 102. The amortized cost of the bonds on the retirement date was $ 137,700. The bonds pay semi-annual interest and the interest payment due on June 30, 2021, has been made and recorded.
b) Dalton Inc. redeemed $ 200,000 of its bonds at 96 on June 30, 2021. The amortized cost of the bonds on the retirement date was $ 196,500. The bonds pay semi-annual interest and the interest payment due on June 30, 2021, has been made and recorded.
Instructions
For each of the independent situations, prepare the journal entry to record the retirement or conversion of the bonds.

Question 32

On July 1, 2021, Gismo Distributors Inc. finances the purchase of a new pickup truck by making a cash down payment of $ 5,000 and issuing a $ 30,000 two-year, 10% note payable for the balance. The note is payable in four equal semi-annual blended payments of $ 8,460 due on December 31, and June 30 of each year.
Instructions
a) Record the purchase of the truck.
b) Prepare the amortization table for the note payable.
c) Record the first and last payments made on the note.

Question 33

United Holdings Inc. requires $ 5,000,000 in new financing in order to expand its operations. The management team is in discussion about the best way to finance the expansion and has asked you, their accountant, for assistance. In order to provide them with the information they need, you analyze the following two options:
1. Issue 1,000,000 common shares at $ 5, which is the current market price of United's 2,000,000 issued common shares.
2. Issue $ 5,000,000 of 10-year, 4% bonds at par. United currently has no bonds payable issued.
The financing would be required at the beginning of the next fiscal year. United's tax rate is 30%. The management team projects profit of $ 1,750,000 before financing costs and taxes. They are interested in comparing the net income after tax, the earnings per share, and the return on equity under each alternative. The management team's goal is to maximize return on equity in the first year. United's shareholders' equity is currently $ 17,500,000.
Instructions
Calculate the amounts requested by the management team and present the two alternatives in comparative format. Recommend which alternative should be chosen.

Question 34

Excerpts from Chung Corporation's income statement and balance sheet for 2021 are presented below: Instructions
a) Calculate the interest coverage ratio.
b) Calculate the debt to total assets ratio.
c) What do the two ratios tell you?

Question 35

Lalapalooza Corporation issues a $ 600,000, 5%, 5-year note payable on January 1, 2021. The terms provide for semi-annual blended payments of $ 68,555 on July 1 and January 1.
Instructions
a) Prepare the journal entries to record the note on January 1, 2021, and the first instalment payment.
b) Assuming Erving has a December 31 year end, prepare the 2021 year-end adjusting entry to account for accrued interest on the note payable. Round your answer to the nearest dollar.
c) Prepare a partial balance sheet at December 31, 2021 for Lalapalooza Corporation displaying all amounts related to the note payable.

Question 36

Kemba Corporation has acquired equipment with a fair market value of $ 145,000 on January 1, 2021 by engaging in a 5-year lease transaction that requires annual lease payments of $ 24,000 beginning January 1, 2021. The leased asset will revert back to the lessor after the lease term. Kemba has the option to purchase the equipment at the end of the lease term at the equipment's fair market value at that time. The economic life of the asset is 8 years and the present value of the minimum lease payments is $ 100,077.
Instructions
Analyze the details of this transaction and determine whether it should be classified as an operating or a finance lease in accordance with IFRS.

Question 37

Company A has a high debt to total assets ratio and a high interest coverage ratio. Company B has a low debt to total assets ratio and a high interest coverage ratio. Company C has a high debt to total assets ratio and a low interest coverage ratio. Company D has a low debt to total assets ratio and a low interest coverage ratio.
Instructions
Based solely on the information provided above, which company or companies would you consider loaning money to? Explain your reasoning.

Question 38

The adjusted trial balance for Raines Corporation at the end of the 2021 fiscal year contained the following accounts: Other information: The mortgage note is payable in monthly payments of $ 700 principal plus interest.
Instructions
a) Prepare the non-current liabilities section of the balance sheet.
b) Indicate the proper balance sheet classification for the accounts listed above that do not belong in the non-current liabilities section.