Financial Accounting: An Integrated Statements Approach, 2nd Edition

On March 1, 2006, Fulton Corporation issued $5,000,000, five-year, 11% bonds at an effective in-

terest rate of 10%, receiving cash proceeds of $5,193,028.50. Interest is paid semiannually on

March 1 and September 1. Fulton Corporation’s fiscal year begins on March 1. The company uses

the effective interest rate method to amortize bond discounts and premiums.

a. Using the present value tables in Appendix A, journalize the entries to record the following:

1. Sale of the bonds.


2. First semiannual interest payment on September 1, 2006 (amortization of premium is to
   be recorded semiannually using the interest method of amortization).


3. Second semiannual interest payment on March 1, 2007.
   b. Compute the amount of bond interest expense for the first year. (Round to the nearest penny.)

The following items were selected from among the transactions completed by Wiggins Manu-

facturing during the current year:

Apr. 7 Borrowed $30,000 from First Financial Corporation, issuing a 60-day, 12% note for that

amount.

May 10 Purchased equipment by issuing a $90,000, 120-day note to Brown Equipment Co., which

discounted the note at the rate of 10%.

June 6 Paid First Financial Corporation the interest due on the note of April 7 and renewed the

loan by issuing a new 30-day, 16% note for $30,000. (Record both the debit and credit to

the notes payable account.)

July 6 Paid First Financial Corporation the amount due on the note of June 6.

Aug. 3 Purchased merchandise on account from Webb Co., $48,000, terms, n/30.

Sept. 2 Issued a 60-day, 15% note for $48,000 to Webb Co., on account.

7 Paid Brown Equipment Co. the amount due on the note of May 10.

Nov. 1 Paid Webb Co. the amount owed on the note of September 2.

15 Purchased store equipment from Shingo Equipment Co. for $150,000, paying $62,000 and

issuing a series of eight 12% notes for $11,000 each, coming due at 30-day intervals.

Dec. 15 Paid the amount due Shingo Equipment Co. on the first note in the series issued on

November 15.

21 Settled a product liability lawsuit with a customer for $83,000, to be paid in January. Wiggins

Manufacturing accrued the loss in a litigation claims payable account.

Instructions

1. Record the transactions.


2. Record the adjusting entry for each of the following accrued expenses at the end of the
   current year:
   a. Product warranty cost, $16,800.
   b. Interest on the seven remaining notes owed to Shingo Equipment Co.

The following accounts, with the balances indicated, appear in the ledger of Roan Outdoor

Equipment Company on December 1 of the current year:

Salaries Payable —

FICA Tax Payable $ 6,667

Employees Federal Income Tax Payable 8,566

Employees State Income Tax Payable 8,334

State Unemployment Tax Payable 840

Federal Unemployment Tax Payable 210

Bond Deductions Payable 1,400

Medical Insurance Payable 3,600

Sales Salaries Expense 640,200

Officers Salaries Expense 283,800

Office Salaries Expense 94,600

Payroll Taxes Expense 79,114

480 Chapter 10 Liabilities

Exercise 10-28

Appendix: Compute bond

price, premium, and journal-

ize entries.

Appendix

Problem 10-1A

Current liability transactions

Goal 1

GENERAL LEDGER

Problem 10-2A

Payroll accounts and year-end

entries

Goal 1

GENERAL LEDGER

ACCOUNTING APPLICATION PROBLEMS