Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 10 Liabilities 475

EXERCISES

Ski World Magazine Inc. sold 5,200 annual subscriptions of Ski Worldfor $50 each during

December 2006. These new subscribers will receive monthly issues, beginning in January 2007.

In addition, the business had taxable income of $225,000 during the first calendar quarter of

2007. The federal tax rate is 35%. A quarterly tax payment will be made on April 7, 2007.
      Prepare the Current Liabilities section of the balance sheet for Ski World Magazine Inc. on
      March 31, 2007. Ignore deferred taxes.

Collins Lighting Co. issues a 90-day note for $600,000 to Wolfman Supply Co. for merchandise

inventory. Wolfman discounts the note at 10%.

a. Journalize Collins’ entries to record:

1. The issuance of the note.


2. The payment of the note at maturity.
   b. Journalize Wolfman’s entries to record:


3. The receipt of the note.


4. The receipt of the payment of the note at maturity.

A borrower has two alternatives for a loan: (1) issue a $75,000, 90-day, 7% note or (2) issue a

$75,000, 90-day note that the creditor discounts at 7%.

a. Calculate the amount of the interest expense for each option.

b. Determine the proceeds received by the borrower in each situation.

c. Which alternative is more favorable to the borrower? Explain.

A business issued a 60-day, 8% note for $60,000 to a creditor on account. Record the entries for

(a) the issuance of the note and (b) the payment of the note at maturity, including interest.

On June 30, Zahovik Game Company purchased land for $125,000 and a building for $365,000,

paying $190,000 cash and issuing an 8% note for the balance, secured by a mortgage on the prop-

erty. The terms of the note provide for 20 semiannual payments of $15,000 on the principal plus

the interest accrued from the date of the preceding payment. Record the entries for (a) the trans-

action on June 30, (b) the payment of the first installment on December 31, and (c) the payment

of the second installment the following June 30.

The Sun Construction Company borrowed $1,200,000 on July 1, 2007, at an annual interest

rate of 12%. The note payable is to be repaid in annual installments of $300,000, plus accrued

interest, on each June 30th beginning June 30, 2008, until the note is paid in full (on June 30,

2011). Determine the current liabilities disclosed on the December 31, 2007, balance related to

this transaction.

An employee earns $32 per hour and 1^1 – 2 times that rate for all hours in excess of 40 hours per

week. Assume that the employee worked 50 hours during the week. Assume further that the

FICA tax rate was 7.5% and federal income tax to be withheld was $410.

a. Determine the gross pay for the week.

b. Determine the net pay for the week.

Exercise 10-1

Current liabilities

Goal 1

Total current liabilities,
$273,750

Exercise 10-2

Entries for discounting notes
payable

Goal 1

Exercise 10-3

Evaluate alternative notes

Goal 1

Exercise 10-4

Entries for notes payable

Goal 1

Exercise 10-5

Fixed asset purchases with
note

Goal 1

Exercise 10-6

Notes payable and maturities
currently due

Goal 1

Exercise 10-7

Calculate payroll

Goal 1

b. Net pay, $1,218