The unadjusted trial balance of Blanton Department Store at December 31, 2013 is below.
The unadjusted trial balance of Blanton Department Store at December 31, 2013 is below.
Accounts receivable 142,500
Accounts payable 98,500
Short-term notes payable 250,000
Mortgage note payable 1,000,000
Listed below are selected transactions of Blanton Department Store as of the fiscal year end, December 31, 2013.
On December 5, the store received $500 from a customer as a refundable deposit for sales that will be made in January.
During December, cash sales totaled $798,000. The total includes 5% sales tax that must be remitted to the state of MN by the fifteenth of the following month.
On December 10, the store purchased (in cash) three delivery trucks for $120,000. The trucks were purchased in MN. Therefore, a 5% sales tax applies.
Blanton determined it will cost $100,000 to restore the area (considered a land improvement) surrounding one of its store parking lots, when the store is closed in 2 years. Blanton estimates the fair value of the obligation at December 31 is $84,000.
Required
Prepare all the journal entries necessary to record the transactions noted above as they occurred and any necessary adjusting journal entries at December 31. Ensure you date each entry.
Prepare the current and long-term liability sections as at December 31, 2013.
Eastern Chemical Company is involved with several situations that could lead to contingencies. Each is described below.
During 2014, Eastern became involved in a tax dispute with the IRS. Eastern’s attorneys
have indicated that they believe it is probable that Eastern will lose this dispute. They also
believe that Eastern will have to pay the IRS between $900,000 and $1,400,000. After the 2014
financial statements were issued, the case was settled with the IRS for $1,200,000.
On October 1, 2014, Eastern was identified as a potentially responsible party by the
Environmental Protection Agency. Eastern’s management along with its counsel have concluded that it is probable that Eastern will be responsible for damages, and a reasonable estimate of these damages is $5,000,000. Eastern’s insurance policy of $9,000,000 has a deductible clause of $500,000.
Eastern had a manufacturing plant in Egypt, which was destroyed during the recent Arab uprising. It is not certain who will compensate Eastern for this destruction, but Eastern has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant, but more than its book value.
Required
For each of the three situations, how should the contingency be reported in the financial statements of Eastern?
Prepare any necessary journal entries and disclosure notes.
On January 1, 2014, Crystal Corporation issued a $100,000 10-year bonds at 11%. Interest is paid annually on December 31. The bonds were sold for $94,349 and the yield is 12%.
Required
Prepare an amortization schedule that determines interest at the effective interest rate.
Prepare an amortization schedule by the straight-line method.
Prepare the journal entries to record interest expense on December 31, 2016, by each of the two methods.
Explain why the pattern of interest differs between the two methods.
Assume the market rate is still 12%, what price would a second investor pay the first investor on December 31, 2016 for $35,000 of the bonds?
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