9.2: Exercises

EXERCISE 9–1 (LO1)

Ajam Inc. shows the following selected adjusted account balances at March 31, 2024:

Accounts Payable	$ 58,000
Wages Payable	102,000
Accumulated Depreciation – Machinery	69,000
Income Taxes Payable	92,000
Note Payable, due May 15, 2026	108,000
Note Payable, due November 30, 2024	64,000
Mortgage Payable	320,000
Accounts Receivable	71,000

Note: $240,000 of the mortgage payable balance is due one year beyond the balance sheet date; the remainder will be paid within the next 12 months.

Required: Prepare the liability section of Ajam's March 31, 2024 balance sheet.

EXERCISE 9–2 (LO2)

On June 7, 2024, Dilby Mechanical Corp. completed $50,000 of servicing work for a client and billed them for that amount plus GST of $2,500 and PST of $3,500; terms are n20.

Required:

1. Prepare the journal entry as it would appear in Dilby's accounting records.
2. Assume the receivable established on June 7 was collected on June 27. Record the entry.

EXERCISE 9–3 (LO2)

Libra Company borrowed $300,000 by signing a 3.5%, 45-day note payable on July 1, 2024. Libra's year-end is July 31. Round all calculations to two decimal places.

Required:

1. Prepare the entry to record the issuance of the note on July 1, 2024.
2. Prepare the entry to accrue interest on July 31, 2024.
3. On what date will this note mature?
4. Prepare the entry to record the payment of the note on the due date.

EXERCISE 9–4 (LO3)

On January 23, 2024, Zenox Company sold $105,000 of furniture on account that had a cost of $82,000. All of Zenox's sales are covered by an unconditional 24-month replacement warranty. Historical data indicates that warranty costs average 2% of the cost of sales. On January 29, 2024, Zenox replaced furniture with a cost of $2,000 that was covered by warranty.

Required:

1. Prepare the journal entry to record the estimated warranty liability for January.
2. Prepare the entry to record the warranty expense incurred in January.
3. Assuming the Estimated Warranty Liability account had a credit balance of $740 on January 1, 2024, calculate the balance at January 31, 2024 after the entries above were posted.

EXERCISE 9–5 (LO2)

An extract from the trial balance of Paragon Corporation at December 31, 2023 is reproduced below:

		Amount in unadjusted trial balance	Amount in adjusted trial balance
a.	Salaries expense (J. Smith)	$50,000	$52,000
b.	Employee income taxes payable	-0-	500
c.	Employment insurance payable	1,000	96
d.	Government pension payable	-0-	160

Additional Information: Employees pay 2% of their gross salaries to the government employment insurance plan and 4% of gross salaries to the government pension plan. The company matches employees' government pension contributions 1 to 1, and employment insurance contributions 1.4 to 1.

Required:

1. Prepare the adjusting entry that was posted, including a plausible description.
2. Prepare the journal entries to record the payments on January 5, 2024 to employee J. Smith and the Government of Canada.

EXERCISE 9–6 (LO3)

Paul's Roofing Corporation paid monthly corporate income tax instalments of $500 commencing February 15, 2023. The company's income before income taxes for the year ended December 31, 2023 was $15,000. The corporate income tax rate is 40%. Paul's Roofing paid the 2023 corporate income taxes owing on January 31, 2024.

Required:

1. Record the February 15, 2023 payment.
2. Record the 2023 corporate income tax expense.
3. Record the January 31, 2024 payment.

Leong Corporation was authorized to issue $500,000 face value bonds on January 1, 2022. The corporation issued $100,000 of face value bonds on that date. The bonds will mature on December 31, 2025. Interest is paid semi-annually on June 30 and December 31 each year. The bond interest rate per the terms of the indenture is 12% per year.

EXERCISE 9–7 (LO4)

Leong Corporation was authorized to issue $500,000 face value bonds on January 1, 2022. The corporation issued $100,000 of face value bonds on that date. The bonds will mature on December 31, 2025. Interest is paid semi-annually on June 30 and December 31 each year. The bond interest rate per the terms of the indenture is 12% per year.

Required: Answer the questions for each of the following cases.

Case A: The bonds were issued at face value.

Case B: The bonds were issued for $112,000.

Case C: The bonds were issued for $88,000.

1. How much cash does Leong receive for the bonds?
2. How much annual interest must the corporation pay? On what amount does the corporation pay?
3. Prepare the journal entry to record the sale of the bonds.
4. Record the entries applicable to interest and straight-line amortization for June 30, 2022 and for December 31, 2022.

EXERCISE 9–8 (LO4) Bonds Issued at a Discount and Retired

On January 1, 2022, the date of bond authorization, Nevada Inc. issued a 3-year, 12-per cent bond with a face value of $100,000 at 94. Semi-annual interest is payable on June 30 and December 31.

Required:

1. Prepare journal entries to record the following transactions:
   1. The issuance of the bonds.
   2. The interest payment on June 30, 2022.
   3. The amortization of the discount on June 30, 2022 (use the straight-line method of amortization).
2. Calculate the amount of interest paid in cash during 2022 and the amount of interest expense that will appear in the 2022 income statement.
3. Prepare a partial balance sheet at December 31, 2022 showing how the bonds payable and the discount on the bonds should be shown on the balance sheet.
4. Prepare the journal entry to record the retirement of the bonds on December 31, 2024.
5. Prepare the journal entry on January 1, 2023, assuming the bonds were called at 102.

EXERCISE 9–9 (LO4) Bonds Issued at a Premium and Retired

On January 1, 2024, the date of bond authorization, Sydney Corp. issued 3-year, 12-per cent bonds with a face value of $200,000 at 112. Semi-annual interest is payable on June 30 and December 31.

Required:

1. Prepare the journal entries to record the following transactions:
   1. The issuance of the bonds.
   2. The interest payment on June 30, 2024.
   3. The amortization of the premium on June 30, 2024 (use the straight-line method of amortization).
2. Calculate the amount of interest paid in cash during 2019 and the amount of interest expense that will appear in the 2019 income statement. Why are these amounts different?
3. Prepare a partial balance sheet at December 31, 2024 showing how the bonds payable and the premium on bonds should be shown on the balance sheet.
4. Prepare the journal entry on January 1, 2027 when the bonds were called at 106.

EXERCISE 9–10 (LO4) Bonds Issued between Interest Dates

On September 1, 2022, Harvort Inc. issues $100,000, 10-year, 8% bonds at par. Interest is payable each May 1 and November 1. The company year-end is December 31.

Required: Prepare the journal entries to record the following transactions:

1. The issuance of the bonds.
2. The journal entries for 2023.
3. The bond at maturity.
4. Prepare a partial balance sheet at December 31, 2023 showing how the bonds and interest payable should be shown on the balance sheet.

EXERCISE 9–11 (LO5) Long Term Loan Payable

Rosedale Corp. obtained a $50,000 loan from Second Capital Bank on January 1, 2026. It purchases a piece of heavy equipment for $48,000 on the same day. The loan bears interest at 6% per year on the unpaid balance and is repayable in three annual blended payments of $18,705 on December 31 each year.

Required:

1. Prepare the journal entries to record the following transactions:
   1. Receipt of loan proceeds from the bank.
   2. Purchase of the equipment.
2. Prepare the loan repayment schedule.
3. Prepare the journal entry to record the first loan payment.
4. Prepare the liabilities section of the balance sheet in good form, including all disclosures, for this loan at December 31, 2026. (Hint: The current portion of a long-term liability must be reported.)

EXERCISE 9–12 (LO4)

Required: Complete the following by responding either premium or discount.

1. If the market rate of interest is 15 per cent and the bond interest rate is 10 per cent, the bonds will sell at a
    
   .
2. If a bond's interest rate is 10 per cent and the market rate of interest is 8 per cent, the bonds will sell at a
    
   .
3. In computing the carrying amount of a bond, unamortised
    
   is subtracted from the face value of the bond.
4. In computing the carrying amount of a bond, unamortised
    
   is added to the face value of the bond.
5. If a bond sells at a
    
   , an amount in excess of the face value of the bond is received on the date of issuance.
6. If a bond sells at a
    
   , an amount less than the face value of the bond is received on the date of issuance.

EXERCISE 9–13 (LO4)

On January 1, 2024, the date of bond authorization, Nevada Inc. issued a 3-year, 12-per cent bond with a face value of $100,000 at 94. Semi-annual interest is payable on June 30 and December 31.

Required: Prepare the journal entry to record the issuance of the bonds on January 1, 2019.

EXERCISE 9–14 (LO4)

On January 1, 2024, the date of bond authorization, Sydney Corp. issued 3-year, 12-per cent bonds with a face value of $200,000 at 112. Semi-annual interest is payable on June 30 and December 31.

Required: Prepare the journal entry to record the issuance of the bonds on January 1, 2024.

EXERCISE 9–15 (LO5)

Rosedale Corp. obtained a $50,000 loan from Second Capital Bank on January 1, 2023. It purchased a piece of heavy equipment for $48,000 on the same day. The loan bears interest at 6% per year on the unpaid balance and is repayable in three annual blended payments of $18,705 on December 31 each year.

Required:

1. Prepare the journal entries to record the following transactions:
   1. Receipt of loan proceeds from the bank.
   2. Purchase of the equipment.
2. Prepare the loan repayment schedule.
3. Prepare the journal entry to record the first loan payment.

Problems

PROBLEM 9–1 (LO5)

Zinc Corp. obtained a $100,000 loan from First Capital Bank on December 31, 2023. It purchased a piece of heavy equipment for $95,000 on January 2, 2024. The loan bears interest at 8% per year on the unpaid balance and is repayable in four annual blended payments of $30,192 on December 31 each year, starting in 2024.

Required:

1. Prepare the journal entries to record the following transactions:
   1. Receipt of loan proceeds from the bank.
   2. Purchase of the equipment.
2. Prepare the loan repayment schedule in the following format:

   Zinc Corp.
   Loan Repayment Schedule
   	A	B	C	D	E
   Year Ended Dec. 31	Beginning Loan Balance	Interest Expense	(D – B) Reduction of Loan Payable	Total Loan Payment	(A – C) Ending Loan Balance
   2024
   2025
   2026
   2027

3. Prepare the journal entry to record the last loan payment.
4. Prepare a partial balance sheet showing the loan liability at December 31, 2025

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1. These were the sales tax rates in effect at the time of writing, July 2014.

2. Present Value (PV) calculations can be done using tables or a business calculator. Table values are rounded causing results to be less accurate. Since business calculators have PV functionality, all PV calculations should be done using a calculator. PV calculations are reviewed in Section 9.6. Given the variety of calculators on the market, students should take responsibility for knowing how to do PV calculations using their own calculator.

2. Employee's $100 portion + Employer's $140 portion

4. Employee's $50 portion + Employer's $50 portion