Chapter 11 sample test

 

 

1.††††† The First Corporation issued a $1,000, 6%, 10-year bond on January 1.Calculate the total cash amount the corporation will pay out over the life of the bond.

 

The key to this problem is to recognize that over the life of a bond, a company's cash payments consist of the bond principal and interest.The company's total cash payments will be $1,600.

 

Bond principal

$1,000

Bond interest ($1,000 x .06 x 10)

$600

Total cash payments

$1,600

 

See text exercise 11.1 for similar material.

 

 

2.††††† Calculate the Second Corporationís 3-year cost of borrowing for the following bond: $2,000 principal, 7% annual interest, 3-year life.Cash received by the corporation when it issued the bond was $2,000.

 

The key to this problem is to recognize that the total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.The company's 3-year cost of borrowing will be $420.Note the bond was issued at its principal amount.

 

Cash receipts

 

$2,000

Cash payments

 

 

Bond principal

$2,000

 

Bond interest ($2,000 x .07 x 3)

$420

 

Total cash payments

 

$2,420

3-year cost of borrowing

 

$420

 

See text exercise 11.2 for similar material.

 

 

3.††††† Calculate the Third Corporationís 3-year cost of borrowing for the following bond: $3,000 principal, 7% annual interest, 3-year life.Cash received by the corporation when it issued the bond was $3,100.

 

The key to this problem is to recognize that the total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.The company's 3-year cost of borrowing will be $530.Note the bond was issued at a $100 premium.

 

Cash receipts

 

$3,100

Cash payments

 

 

Bond principal

$3,000

 

Bond interest ($3,000 x .07 x 3)

$630

 

Total cash payments

 

$3,630

3-year cost of borrowing

 

$530

 

See text exercise 11.2 for similar material.

 

 

4.††††† Calculate the Fourth Corporationís 3-year cost of borrowing for the following bond: $4,000 principal, 7% annual interest, 3-year life.Cash received by the corporation when it issued the bond was $3,800.

 

The key to this problem is to recognize that the total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.The company's 3-year cost of borrowing will be $1,040.Note the bond was issued at a $200 discount.

 

Cash receipts

 

$3,800

Cash payments

 

 

Bond principal

$4,000

 

Bond interest ($4,000 x .07 x 3)

$840

 

Total cash payments

 

$4,840

3-year cost of borrowing

 

$1,040

 

See text exercise 11.2 for similar material.

 

 

5.††††† On May 1, the Fifth Corporation issued a $5,000, 12%, 5-year bond and received $5,000.Interest on the bond is to be paid every six months beginning on November 1.

 

Calculate the Fifth Corporationís monthly cost of borrowing by issuing the bond.

 

The key to this problem is to recognize that the monthly cost of borrowing is the total cost of borrowing divided by the number of months in the life of the bond.The total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.The company's monthly cost of borrowing will be $50.Note the bond was issued at its principal amount.

 

Cash receipts

 

$5,000

Cash payments

 

 

Bond principal

$5,000

 

Bond interest ($5,000 x .12 x 5)

$3,000

 

Total cash payments

 

$8,000

5-year cost of borrowing

 

$3,000

 

 

 

Monthly cost of borrowing

[($3,000 / (5 years x 12 months per year)]

 

 

$50

 

See text exercise 11.3 for similar material.

 

 

6.††††† On June 1, the Sixth Corporation issued a $6,000, 6%, 6-year bond and received $6,000.Interest on the bond is to be paid every six months beginning on December 1.

 

Prepare the journal entry the company would make on June 1.

 

The keys to this problem are to recognize that the bond principal is recorded in the bonds payable account while any difference between cash received and the bond principal is recorded in an unamortized discount or unamortized premium account.In this case, since the bond was issued at its principal amount, there isn't any unamortized discount or unamortized premium.

 

Date

Description

Debits

Credits

June 1

Cash

6,000

 

 

Bonds Payable

 

6,000

 

$6,000, 6%, 6-year bond issued

 

 

 

See text exercise 11.3 for similar material.

 

 

7.††††† On July 1, the Seventh Corporation issued a $7,000, 7%, 7-year bond and received $7,000.Interest on the bond is to be paid every six months beginning on January 1.On July 31, the corporation recorded its $41 monthly cost of borrowing.

 

Determine the monthly cost of borrowing effects on the company's resources and sources of resources on July 31.

 

The keys to this problem are to recognize that the company's liabilities increase as the amount of interest it owes increases and stockholder's equity decreases as a result of interest expense.

 

 

 

Total

Resources

 

 

=

 

Sources of Borrowed Resources

 

 

+

Sources of

Owner

Invested Resources

 

 

+

Sources of

Management

Generated Resources

 

 

Assets

=

Liabilities

+

Stockholders' Equity

 

 

+ $41

 

 

+

- $41

 

 

See text exercise 11.3 for similar material.

 

 

8.††††† On August 1, the Eighth Corporation issued an $8,000, 9%, 8-year bond and received $8,000.Interest on the bond is to be paid every six months beginning on February 1.

 

Prepare the journal entry the company would make on August 31.

 

The key to this problem is to recognize that the company will record its monthly interest expense to reflect its monthly cost of borrowing.Interest payable increases each month because the interest is only paid every six months.

 

Date

Description

Debits

Credits

Aug. 31

Interest Expense

60

 

 

Interest Payable

 

60

 

August interest

 

 

 

The company's monthly cost of borrowing (interest expense) will be $60.Note the bond was issued at its principal amount.

 

Cash receipts

 

$8,000

Cash payments

 

 

Bond principal

$8,000

 

Bond interest ($8,000 x .09 x 8)

$5,760

 

Total cash payments

 

$13,760

8-year cost of borrowing

 

$5,760

 

 

 

Monthly cost of borrowing

[($5,760 / (8 years x 12 months per year)]

 

 

$60

 

See text exercise 11.3 for similar material.

 

 

9.††††† On September 1, the Ninth Corporation issued a $9,000, 9%, 9-year bond and received $9,000.Interest on the bond is to be paid every six months beginning on March 1.

 

Prepare the journal entry the company would make on March 1.

 

The key to this problem is to recognize that the company will pay its six-months interest on March 1.

 

Date

Description

Debits

Credits

March 1

Interest Payable

405

 

 

Cash

 

405

 

Six-months interest payment

 

 

 

Interest = principal x rate x time.

 

Six-months interest = $9,000 x .09 x 6/12 = $405.

 

See text exercise 11.3 for similar material.

 

 

10.††† On October 1, the Tenth Corporation issued a $10,000, 10%, 10-year bond and received $10,000.Interest on the bond is to be paid every six months beginning on April 1.

 

Prepare the journal entry the company would make at the end of ten years.

 

The key to this problem is to recognize that the company will pay the bond principal at the end of the life of the bond.

 

Date

Description

Debits

Credits

Oct. 1

Bonds Payable

10,000

 

 

Cash

 

10,000

 

Bond principal payment

 

 

 

See text exercise 11.3 for similar material.

 

 

11.††† The Eleventh Corporation is considering a plan in which it would increase the size of its operations.As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $3,000 per year for 5 years.To increase its operations the company would issue an $11,000, 11%, 5-year bond.The company expects to be able to issue the bond at its principal.

 

Calculate the Eleventh Corporationís total expected 5-year increase in income before taxes after considering the cost of borrowing.

 

The key to this problem is to recognize that the cost of borrowing will reduce the company's income before taxes.The company's expected increase in income before taxes is $8,950.

 

Expected increase from operations ($3,000 x 5 years)

$15,000

Less: Cost of borrowing

$6,050

Increase in income before taxes

$8,950

 

The total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.Note the bond is expected to be issued at its principal amount.

 

Cash receipts

 

$11,000

Cash payments

 

 

Bond principal

$11,000

 

Bond interest ($11,000 x .11 x 5)

$6,050

 

Total cash payments

 

$17,050

5-year cost of borrowing

 

$6,050

 

See text exercise 11.5 for similar material.

 

 

12.††† On December 1, the Twelfth Corporation issued a $12,000, 10%, 4-year bond and received $12,960.Interest on the bond is to be paid every six months beginning on June 1.On December 31, the corporation recorded its monthly cost of borrowing.

 

Determine the monthly cost of borrowing effects on the company's resources and sources of resources on December 31.

 

The keys to this problem are (1) to recognize that the monthly cost of borrowing is the total cost of borrowing divided by the number of months in the life of the bond and (2) since interest is to be paid only every six months, each month the monthly cost of borrowing increases the company's liabilities and decreases its sources of management-generated resources.

 

The total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.The company's monthly cost of borrowing will be $80.Note the bond was issued at a $960 premium ($12,960 - $12,000).

 

Cash receipts

 

$12,960

Cash payments

 

 

Bond principal

$12,000

 

Bond interest ($12,000 x .10 x 4)

$4,800

 

Total cash payments

 

$16,800

4-year cost of borrowing

 

$3,840

 

 

 

Monthly cost of borrowing

[($3,840 / (4 years x 12 months per year)]

 

 

$80

 

 

 

 

Total

Resources

 

=

 

Sources of Borrowed Resources

 

+

Sources of

Owner

Invested Resources

 

 

+

Sources of

Management

Generated Resources

 

 

 

Assets

=

Liabilities

+

Stockholders' Equity

 

 

 

+ $80

 

 

 

- $80

 

 

See text exercise 11.5 for similar material.

 

 

13.††† On January 1, the Thirteenth Corporation issued a $13,000, 7%, 6-year bond and received $13,350.Interest on the bond is to be paid every six months beginning on July 1.

 

Prepare the journal entry the company would make on January 1.

 

The keys to this problem are to recognize that the bond principal is recorded in the bonds payable account while any difference between cash received and the bond principal is recorded in an unamortized discount or unamortized premium account.In this case, the bond was issued at a $350 premium.

 

Date

Description

Debits

Credits

January 1

Cash

13,350

 

 

Bonds Payable

 

13,000

 

Unamortized Premium on Bonds Payable

 

350

 

$13,000, 7%, 6-year bond issued

 

 

 

See text exercise 11.5 for similar material.

 

 

14.††† On February 1, the Fourteenth Corporation issued a $14,000, 9%, 5-year bond and received $14,600.Interest on the bond is to be paid every six months beginning on August 1.

 

Prepare the journal entry the company would make on February 28.

 

The key to this problem is to recognize that the company will record its monthly interest expense to reflect its monthly cost of borrowing.Interest payable increases each month because the interest is only paid every six months.Since the bond was issued at a $600 premium, the unamortized premium must be reduced each month.

 

Date

Description

Debits

Credits

Feb. 28

Interest Expense

95

 

 

Unamortized Premium on Bonds Payable

10

 

 

Interest Payable

 

105

 

February interest

 

 

 

The company's monthly cost of borrowing (interest expense) will be $95.Note the bond was issued at a $600 premium ($14,600 - $14,000).

 

Cash receipts

 

$14,600

Cash payments

 

 

Bond principal

$14,000

 

Bond interest ($14,000 x .09 x 5)

$6,300

 

Total cash payments

 

$20,300

5-year cost of borrowing

 

$5,700

 

 

 

Monthly cost of borrowing

[($5,700 / (5 years x 12 months per year)]

 

 

$95

 

 

Monthly interest payable liability = ($14,000 x .09) / 12 months = $105.

 

Monthly premium amortization = $600 / 60 months = $10.

 

See text exercise 11.5 for similar material.

 

 

15.††† On March 1, the Fifteenth Corporation issued a $15,000, 6%, 15-year bond and received $15,900.Interest on the bond is to be paid every six months beginning on September 1.

 

Prepare the journal entry the company would make on September 1.

 

The key to this problem is to recognize that the company will pay its six-months' interest on September 1.

 

Date

Description

Debits

Credits

Sept. 1

Interest Payable

450

 

 

Cash

 

450

 

Six-months interest payment

 

 

 

Interest = principal x rate x time.

 

Six-months' interest = $15,000 x .06 x 6/12 = $450.

 

See text exercise 11.5 for similar material.

 

 

16.††† On April 1, the Sixteenth Corporation issued a $16,000, 8%, 7-year bond and received $16,672.Interest on the bond is to be paid every six months beginning on October 1.

 

Prepare the journal entry the company would make at the end of seven years.

 

The key to this problem is to recognize that the company will pay the bond principal at the end of the life of the bond.

 

Date

Description

Debits

Credits

April 1

Bonds Payable

16,000

 

 

Cash

 

16,000

 

Bond principal payment

 

 

 

See text exercise 11.5 for similar material.

 

 

17.††† The Seventeenth Corporation is considering a plan in which it would increase the size of its operations.As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $2,000 per year for five years.To increase its operations the company would issue a $17,000, 10%, 5-year bond.The company expects to be able to issue the bond for $17,800.

 

Calculate the Eleventh Corporationís total expected 5-year increase in income before taxes after considering the cost of borrowing.

 

The key to this problem is to recognize that the cost of borrowing will reduce the company's income before taxes.The company's expected increase in income before taxes is $2,300.

 

Expected increase from operations ($2,000 x 5 years)

$10,000

Less: Cost of borrowing

$7,700

Increase in income before taxes

$2,300

 

The total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.Note the bond is expected to be issued at an $800 premium ($17,800 - $17,000).

 

Cash receipts

 

$17,800

Cash payments

 

 

Bond principal

$17,000

 

Bond interest ($17,000 x .10 x 5)

$8,500

 

Total cash payments

 

$25,500

5-year cost of borrowing

 

$7,700

 

See text exercise 11.6 for similar material.

 

 

18.††† On June 1, the Eighteenth Corporation issued an $18,000, 6%, 4-year bond and received $17,280.Interest on the bond is to be paid every six months beginning on December 1.On June 30, the corporation recorded its monthly cost of borrowing.

 

Determine the monthly cost of borrowing effects on the company's resources and sources of resources on June 30.

 

The keys to this problem are (1) to recognize that the monthly cost of borrowing is the total cost of borrowing divided by the number of months in the life of the bond and (2) since interest is to be paid only every six months, each month the monthly cost of borrowing increases the company's liabilities and decreases its sources of management-generated resources.

 

The total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.The company's monthly cost of borrowing will be $105.Note the bond was issued at a $720 discount ($18,000 - $17,280).

 

Cash receipts

 

$17,280

Cash payments

 

 

Bond principal

$18,000

 

Bond interest ($18,000 x .06 x 4)

$4,320

 

Total cash payments

 

$22,320

4-year cost of borrowing

 

$5,040

 

 

 

Monthly cost of borrowing

[($5,040 / (4 years x 12 months per year)]

 

 

$105

 

See text exercise 11.3 for similar material.

 

 

 

 

Total

Resources

 

=

 

Sources of Borrowed Resources

 

+

Sources of

Owner

Invested Resources

 

 

+

Sources of

Management

Generated Resources

 

 

 

Assets

=

Liabilities

+

Stockholders' Equity

 

 

 

+ $105

 

 

 

- $105

 

 

See text exercise 11.7 for similar material.

 

 

20.††† On July 1, the Nineteenth Corporation issued a $14,000, 7%, 4-year bond and received $13,424.Interest on the bond is to be paid every six months beginning on January 1.

 

Prepare the journal entry the company would make on July 1.

 

The keys to this problem are to recognize that the bond principal is recorded in the bonds payable account while any difference between cash received and the bond principal is recorded in an unamortized discount or unamortized premium account.In this case, the bond was issued at a discount.

 

Date

Description

Debits

Credits

July 1

Cash

13,424

 

 

Unamortized Discount on Bonds Payable

576

 

 

Bonds Payable

 

14,000

 

$14,000, 7%, 4-year bond issued

 

 

 

See text exercise 11.7 for similar material.

 

 

20.††† On August 1, the Twentieth Corporation issued a $19,000, 6%, 5-year bond and received $18,040.Interest on the bond is to be paid every six months beginning on Febuary 1.

 

Prepare the journal entry the company would make on August 31.

 

The key to this problem is to recognize that the company will record its monthly interest expense to reflect its monthly cost of borrowing.Interest payable increases each month because the interest is only paid every six months.Since the bond was issued at a discount, the unamortized discount must be reduced each month.

 

Date

Description

Debits

Credits

Aug. 31

Interest Expense

111

 

 

Interest Payable

 

95

 

Unamortized Discount on Bonds Payable

 

16

 

August interest

 

 

 

The company's monthly cost of borrowing (interest expense) will be $111.Note the bond was issued at a $960 discount ($19,000 - $18,040).

 

Cash receipts

 

$18,040

Cash payments

 

 

Bond principal

$19,000

 

Bond interest ($19,000 x .06 x 5)

$5,700

 

Total cash payments

 

$24,700

5-year cost of borrowing

 

$6,660

 

 

 

Monthly cost of borrowing

[($6,660 / (5 years x 12 months per year)]

 

 

$111

 

 

Monthly interest payable liability = ($19,000 x .06) / 12 months = $95.

 

Monthly discount amortization = $960 / 60 months = $16.

 

See text exercise 11.7 for similar material.

 

 

21.††† On September 1, the Twenty-first Corporation issued a $21,000, 8%, 3-year bond and received $20,100.Interest on the bond is to be paid every six months beginning on March 1.

 

Prepare the journal entry the company would make on March 1.

 

The key to this problem is to recognize that the company will pay its six-months interest on September 1.

 

Date

Description

Debits

Credits

March 1

Interest Payable

840

 

 

Cash

 

840

 

Six-months' interest payment

 

 

 

Interest = principal x rate x time.

 

Six-months' interest = $21,000 x .08 x 6/12 = $840.

 

See text exercise 11.7 for similar material.

 

 

22.††† On October 1, the Twenty-second Corporation issued a $22,000, 9%, 7-year bond and received $20,992.Interest on the bond is to be paid every six months beginning on April 1.

 

Prepare the journal entry the company would make at the end of seven years.

 

The key to this problem is to recognize that the company will pay the bond principal at the end of the life of the bond.

 

Date

Description

Debits

Credits

Oct. 1

Bonds Payable

22,000

 

 

Cash

 

22,000

 

Bond principal payment

 

 

 

See text exercise 11.7 for similar material.

 

 

23.††† The Twenty-third Corporation is considering a plan in which it would increase the size of its operations.As a result of the increased operations, without considering the cost of borrowing, the company expects income before taxes to increase by $4,000 per year for five years.To increase its operations the company would issue a $23,000, 9%, 5-year bond.The company expects to be able to issue the bond for $21,500.

 

Calculate the Twenty-third Corporationís total expected 5-year increase in income before taxes after considering the cost of borrowing.

 

The key to this problem is to recognize that the cost of borrowing will reduce the company's income before taxes.The company's expected increase in income before taxes is $8,150.

 

Expected increase from operations ($4,000 x 5 years)

$20,000

Less: Cost of borrowing

$11,850

Increase in income before taxes

$8,150

 

The total cost of borrowing is the difference between the cash paid out over the life of a bond and the cash received when the bond is issued.Note the bond is expected to be issued at a $1,500 discount ($23,000 - $21,500).

 

Cash receipts

 

$21,500

Cash payments

 

 

Bond principal

$23,000

 

Bond interest ($23,000 x .09 x 5)

$10,350

 

Total cash payments

 

$33,350

5-year cost of borrowing

 

$11,850

 

See text exercise 11.8 for similar material.

 

 

24.††† The Twenty-fourth Corporation is considering retiring one of its bond issues.The bond is a $24,000, 8%, 4-year bond, issued three years ago at par.

 

Calculate the gain or loss the company would recognize if it retired the bond for $24,400.Assume that all appropriate interest payments will be made on the bond before it is retired.

 

The key to this problem is to recognize that a gain or loss on the early retirement of debt is the difference between the liability eliminated (retired) and the total resources used up in eliminating the liability.In this case, the loss on early retirement of the bond is $400.

 

Liability eliminated:

 

Bonds payable

$24,000

Resources (cash) used to retire debt

$24,400

Loss on early retirement of debt (bonds)

$400

 

See text exercise 11.9 for similar material.

 

 

25.††† The Twenty-fifth Corporation retired one of its bonds on January 25 by paying $24,200.The bond was a $25,000, 9%, 6-year bond, issued four years ago at par.

 

Prepare the journal entry the company would make when it retired the bond.

 

The key to this problem is to recognize that a gain or loss on the early retirement of debt is the difference between the liability eliminated (retired) and the total resources used up in eliminating the liability.In this case, the gain on early retirement of the bond is $800.

 

Liability eliminated:

 

Bonds Payable

$25,000

Resources (cash) used to retire debt

$24,200

Gain on early retirement of debt (bonds)

$800

 

 

Date

Description

Debits

Credits

Jan. 25

Bonds Payable

25,000

 

 

Cash

 

24,200

 

Gain on Early Retirement of Debt

 

800

 

$25,000 bond retirement

 

 

 

See text exercise 11.9 for similar material.

 

 

26.††† The Twenty-sixth Corporation is considering retiring one of its bonds.The bond is a $26,000, 6%, 7-year bond, issued two years ago at a $672 premium.

 

Calculate the gain or loss the company would recognize if it retired the bond for $26,100.Assume that all appropriate interest payments will be made on the bond before it is retired.

 

The key to this problem is to recognize that a gain or loss on the early retirement of debt is the difference between the liability eliminated (retired) and the total resources used up in eliminating the liability.Since the bond was issued at a premium, when the bond is retired the amounts related to the bond would have to be eliminated from both the bonds payable account and the unamortized premium on bonds payable account.The bonds payable account reports $26,000 just before the bond is retired.The unamortized premium on bonds payable account reports $480 just before the bond is retired.In this case, the gain on early retirement of the bond is $380.

 

Liability eliminated:

 

 

Bonds payable

$26,000

 

Plus: Unamortized premium on bonds payable

$480

$26,480

Resources (cash) used to retire debt

 

$26,100

Gain on early retirement of debt (bonds)

 

$380

 

The unamortized premium on bonds payable would have been reduced by $192 during the first two years.$672 premium / 7 years = $96 premium amortization per year.$96 x 2 years = $192.At the end of two years, before the bond is retired, the unamortized premium on bonds payable would be $480 ($672 - $192 = $480).

 

See text exercise 11.10 for similar material.

 

 

27.††† The Twenty-seventh Corporation is considering retiring one of its bonds.The bond is a $27,000, 8%, 5-year bond, issued three years ago at a $600 discount.

 

Calculate the gain or loss the company would recognize if it retired the bond for $26,500.Assume that all appropriate interest payments will be made on the bond before it is retired.

 

The key to this problem is to recognize that a gain or loss on the early retirement of debt is the difference between the liability eliminated (retired) and the total resources used up in eliminating the liability.Since the bond was issued at a discount, when the bond is retired the amounts related to the bond would have to be eliminated from both the bonds payable account and the unamortized discount on bonds payable account.The bonds payable account reports $27,000 just before the bond is retired.The unamortized discount on bonds payable account reports $240 just before the bond is retired.In this case, the gain on early retirement of the bond is $260.

 

Liability eliminated:

 

 

Bonds payable

$27,000

 

Less: Unamortized discount on bonds payable

$240

$26,760

Resources (cash) used to retire debt

 

$26,500

Gain on early retirement of debt (bonds)

 

$260

 

The unamortized discount on bonds payable would have been reduced by $360 during the first two years.$600 discount / 5 years = $120 discount amortization per year.$120 x 3 years = $360.At the end of three years, before the bond is retired, the unamortized discount on bonds payable would be $240 ($600 - $360 = $240).

 

See text exercise 11.10 for similar material.

 

 

28.††† There are several differences between the accounting methods the Twenty-eighth Corporation uses in the preparation of its financial statements and in the preparation of its federal income taxes return.For the month ended March 31, the companyís taxable income on its income statement was $28,000, while it was $25,000 for income taxes purposes.The companyís income taxes rate is 35%.

 

Calculate the amount of deferred income taxes payable the company would record on March 31.

 

The key to this problem is to recognize that deferred taxes are postponed taxes.Income taxes expense is based on the company's income statement, while income taxes payable is based on the company's income taxes return.The company's deferred income taxes payable for March would be $1,050.

 

Income taxes expense ($28,000 x .35)

$9,800

Income taxes payable ($25,000 x .35)

$8,750

Deferred income taxes payable

$1,050

 

See text exercise 11.11 for similar material.

 

 

29.††† For the month ended April 30, the Twenty-ninth Corporationís taxable income on its income statement was $29,000, while it was $27,000 for income taxes purposes.The companyís income taxes rate was 35% and taxes were not paid until May.

 

Prepare the journal entry the company would make to record it income taxes on April 30.

 

The key to this problem is to recognize that deferred taxes are postponed taxes.Income taxes expense is based on the company's income statement, while income taxes payable is based on the company's income taxes return.The company's deferred income taxes payable for April would be $700.

 

Income taxes expense ($29,000 x .35)

$10,150

Income taxes payable ($27,000 x .35)

$9,450

Deferred income taxes payable

$700

 

Date

Description

Debits

Credits

Apr. 30

Income Taxes Expense

10,150

 

 

Income Taxes Payable

 

9,450

 

Deferred Income Taxes Payable

 

700

 

April income taxes

 

 

 

See text exercise 11.1 for similar material.

 

 

30.††† The Thirtieth Corporation acquired equipment through a 6-year capital lease.The first monthly lease payment of $30,000 represents $20,000 principal and $10,000 interest.

 

Determine how the $30,000 lease payment effects on the company's resources and sources of resources.

 

The key to this problem is to recognize that a capital lease payment reduces the company's resources (assets), reduces the company's capital lease liability, and results in an expense (reduces sources of management generated resources).

 

 

 

 

Total

Resources

 

=

 

Sources of Borrowed Resources

 

+

Sources of

Owner

Invested Resources

 

 

+

Sources of

Management

Generated Resources

 

 

 

Assets

=

Liabilities

+

Stockholders' Equity

 

- $30,000

 

- $20,000

 

 

 

- $10,000

 

 

See text exercise 11.2 for similar material.

 

 

31.††† The Thirty-first Corporation acquired equipment through a 7-year capital lease.The July lease payment of $31,000 represents $5,000 principal and $26,000 interest.

 

Prepare the journal entry the company would make to record the July lease payment.

 

The key to this problem is to recognize that a capital lease payment reduces the company's resources (assets), reduces the company's capital lease liability, and results in an expense (reduces sources of management generated resources).

 

Date

Description

Debits

Credits

July 31

Obligations Under Capital Lease

5,000

 

 

Interest Expense

26,000

 

 

Cash

 

31,000

 

July lease payment

 

 

 

See text exercise 11.12 for similar material.

 

 

32.††† The following information is from the records of the Thirty-second Corporation.

 

 

Year 1

Sales

$32,000

Cost of Goods Sold

$14,000

Gross Profit

$18,000

Operating Expenses

$10,000

Income from Operations

$8,000

Other Revenues and (Expenses)

 

Interest Expense

($500)

Income Before Taxes

$7,500

Income Taxes Expense

$2,600

Net Income

$4,900

 

 

Calculate the corporation's interest coverage ratio for Year 1.

 

The key to this problem is to recognize that the interest coverage ratio = (income before taxes + interest expense) / interest expense.

 

Interest coverage ratio = ($7,500 + $500) / $500 = 16.

See text exercise 11.13 for similar material.