F5 Long-Term Liabilities/Note Payables

Gold Co. purchased equipment from Marshall Co. on July 1. Gold paid Marshall $10,000 cash and signed a $100,000 noninterest-bearing note payable, due in 3 years. Gold recorded a $24,868 discount on notes payable related to this transaction. What is the acquired cost of the equipment on July 1?

($100,000 + 10,000 -24,868) = 85,132 **Notes payable will be credited for 100,000 b/c that is the face value of the note. **Cash will be credited for 10,000, b/c it was paid by Gold to Marshall **Discount on notes payable will be debited, b/c the discount offsets the face value of the note **Because Gold is purchasing equipment, the account for equipment will be debited.

A company finances the purchase of equipment with a $500,000 five-year note payable. The note has an interest rate of 12% and a monthly payment of $11,122. After two payments have been made, what amount should the company report as the note payable balance in its December 31 balance sheet? A. $477,756 B. $487,695 C. $487,756 D. $490,061

(a) (b) (c) (d) PMT Interest = (d) x (12%/12) Principal reduction Balance (divide by 12 monthly rate) (a) -(b) (d) - (c) $500,000 $11,122 $500,000 x .01 = $5,000 $6,122 $493,878 $11,122 $493,878 x .01 = $4,939 $6,183 $487,695

On December 31, Year 4, Roth Co. issued a $10,000 note payable to Wake Co. in exchange for services rendered to Roth. The transaction was not in the normal course of business. The note, made at usual trade terms, is due in 9 months and bears interest, payable at maturity, at the annual rate of 3%, a rate that is unreasonable in the circumstances. The market interest rate is 8%, the prevailing rate for similar instruments of issuers with similar credit ratings. The compound interest factor of $1 due in 9 months at 8% is .944. At what amount should the note payable be credited in Roth's December 31, Year 4, balance sheet? A. 10,000 B. 10,300 C. 9,652

10,000 The note is recorded at 10,000.

House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, Year 1, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, Year 1, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, Year 2. A. 418,250 B. 950,000 C. 368,250

A. 418,250 Noninterest bearing notes payable are reported at the present value of future cash flows. The present value totaling 950,000 equals 418,250 (creating a discount on notes payable of 531,750). The present value of the current portion (50,000 due January 2, Year 2) is 50,000.

On January 2, year 1, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest-bearing note due January 2, year 4. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type at January 2, year 1, was 10%. The present value of $1 at 10% for three periods is 0.75.In Emme's year 1 income statement, what amount should be reported as interest income A. 45,000 B. 50,000 C. 60,000 D. 9,000

A. 45,000 Face amount of non-interest bearing note 600,000 Present Value Factor at 10% for 3 periods .75 Carrying amount at 1/2 Year 1 450,000 Interest rate 10% Interest Income for Year 1 45,000

On December 31, Key Co. received two $10,000 noninterest-bearing notes from customers in exchange for services rendered. The note from Alpha Co., which is due in 9 months, was made under customary trade terms, but the note from Omega Co., which is due in 2 years, was not. The market interest rate for both notes at the date of issuance is 8%. The present value of $1 due in 9 months at 8% is .944. The present value of $1 due in 2 years at 8% is .857. At what amounts should these two notes receivable be reported in Key's December 31 balance sheet? Alpha Omega A. 9,440 8.570 B. 10,000 8,570 C. 9,440 10,000

Alpha Omega B. 10,000 8,570 The recorded face value of 10,000. 10,000 x .857 = 8,570

Ace Co. sold to King Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments. This note was discounted to yield a 9% rate to King. The present value factors of an ordinary annuity of $1 for five periods are as follows: 8% 3.992 9% 3.890 What should be the total interest revenue earned by King on this note? A. 5,560 B. 9,000 C. 8,000 D. 5,050

Annual payments = 20,000 / 3,392 = 5,010 Five equal payments of principal & interest x 5 Total Payments 25,050 Discounted note = 5,010 x 3.890 (19,490) Total interest over five years 5,560

Cali Inc. had a $4,000,000 note payable due on March 15, Year 5. On January 28, Year 5, before the issuance of its Year 4 financial statements, Cali issued long-term bonds in the amount of $4,500,000. Proceeds from the bonds were used to repay the note when it came due. How should Cali classify the note in its December 31, Year 4, financial statements? A. As a noncurrent liability, with separate disclosure of the note refinancing. B. As a noncurrent liability, with no separate disclosure required C. As a current liability, with no separate disclosure required.

As a noncurrent liability, with separate disclosure of the note refinancing. Rule: Bonds or notes due within one year are shown as "noncurrent" if the issuer has the intent and ability to refinance with a new issuance of long-term debt. This intent and ability must usually be demonstrated through refinancing of the debt after the balance sheet date, but before the issuance of the financial statements. Separate disclosure of the refinancing is required.

Able, Inc. had the following amounts of long-term debt outstanding at December 31, year 1: 14 1/2% term note, due year 2 $ 3,000 11 1/8% term note, due year 5 107,000 8% note, due in 11 equal annual principal payments, plus interest beginning December 31, year 2 110,000 7% guaranteed debentures, due year 6 100,000 Total $320,000 Assume Able does not elect the fair value option to value financial liabilities. Able's annual sinking-fund requirement on the guaranteed debentures is $4,000 per year. What amount should Able report as current maturities of long-term debt in its December 31, year 1 balance sheet?​ A. $ 7,000 B. $13,000 C. $10,000 D. $ 4,000

B. $13,000

On September 30, World Co. borrowed $1,000,000 on a 9% note payable. World paid the first of four quarterly payments of $264,200 when due on December 30. In its December 31 balance sheet, what amount should World report as note payable? A. $735,800 B. $758,300 C. $825,800 D. $750,000

B. $758,300 Each payment of $264,200 Interest portion $(22,500) - 1,000,000 x .9% / 4 quarterly pmts Payment of $264,200 - Interest of $22,500 = Principal $241,700. The principal pmt of $241,700 will reduce liability from 1,000,000 - 241,700 = 758,300.

A note payable was issued in payment for services received. The services had a fair value less than the face amount of the note payable. The note payable has no stated interest rate. How should the note payable be presented in the statement of financial position? A. At the face amount with a separate deferred asset for the discount calculated at the imputed interest rate. B. At the face amount minus a discount calculated at the imputed interest rate. C. At the face amount. D. At the face amount with a separate deferred credit for the discount calculated at the imputed interest rate.

B. At the face amount minus a discount calculated at the imputed interest rate.

On August 15, Year 1, Benet Co. sold goods for which it received a note bearing the market rate of interest on that date. The four-month note was dated July 15, Year 1. Note that the principal, together with all interest, is due November 15, Year 1. When the note was recorded on August 15, which of the following accounts increased? A. Interest revenue B. Interest receivable C. Prepaid Interest

B. Interest receivable Debit Credit Note receivable 1,000 Interest receivable (1,000 x 12% x 1/12) 10 Revenue 1,010

A company issued a short-term note payable to a bank with a stated 12 percent rate of interest. The bank charged a .5% loan origination fee and remitted the balance to the company. The effective interest rate paid by the company in this transaction would be A. Equal to 12.5%. B. More than 12.5% C. Less than 12.5%. D. Independent of 12.5%

B. More than 12.5% 12 % Int. Rate + 0.5% Loan Orig Fee 12.5% / 100% Face of N/P - 0.5% Loan Orig Fee upfront / 99.5% 12.5% / 99.5% = 12.563%

On November 1, year 1, a company purchased a new machine that it does not have to pay for until November 1, year 3. The total payment on November 1, year 3, will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money concept? A. Present value of annuity of 1. B. Present value of 1. C. Future amount of annuity of 1. D. Future amount of 1.

B. Present value of 1. The cost of the machine would be the total payment (principal and interest all due two years in the future) multiplied by the present value of 1 (at a 10% rate)

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note's receivable balance 6 months after the sale? A) 75% of the original sales price. B) Less than 75% of the original sales price. C) The present value of the remaining monthly payments discounted at 12%. D) Less than the present value of the remaining monthly payments discounted at 12%.

C) The present value of the remaining monthly payments discounted at 12%.

A company issued a financial instrument that unconditionally requires the company to settle the obligation by issuing common stock with a value of $500,000 on the settlement date. How should the company report this instrument in its financial statements? A. As an equity instrument on the balance sheet B. By only disclosing an equity instrument in the notes C. As a liability in the balance sheet.

C. As a liability in the balance sheet. Certain financial instruments have characteristics of liabilities and equity. Forms of shares that are redeemable and represent an unconditional obligation of the issuer to satisfy an obligation by transferring assets are presented as liabilities.

Which of the following is reported as interest expense? A. Pension cost interest B. Postretirement healthcare benefits interest C. imputed interest on non-interest-bearing note D. interest incurred to finance construction of machinery for own use?

C. imputed interest on non-interest-bearing note

On January 1 of the current year, Lean Co. made an investment of $10,000. The following is the present value of $1.00 discounted at a 10% interest rate: Periods Present value of $1.00 discounted at 10% 1. .909 2 .826 3 .751 What amount of cash will Lean accumulate in two years?​ A. $16,250 B. $12,000 C. $27,002 D. $12,107

D. $12,107 Present Value = Future amount x Present value factor $10,000 = Future amount x .826 (present value factor is the discount rate for 2 years) Future amount = $10,000 /.826 = 12,107

In accordance with Sam company loan agreement with First Bank, Sam Company must maintain a debt-to-equity ratio of 0.60 or less. At year-end Sam Company's balance sheet include total liabilities of 55,000 and total stockholder equity of 95,500. What is Sam company's debt to equity ratio at year end and has Sam company met the bank's debt covenant requirement? A) Sam company's debt to equity ratio at year end is 0.37 and has satisfied the banks debt covenant B) Sam company's debt to equity ratio at year is 0.58 and has satisfied the banks debt covenant C) Sam company's debt to equity ratio at year is 0.63 and has not satisfied the banks debt covenant D) Sam company's debt to equity ratio at year is 1.74 and has not satisfied the banks debt covenant

Debt-to-equity ratio is calculated by dividing total liabilities by total stockholder equity. (55,000/95,500 = .58)

Jole Co. lent $10,000 to a major supplier in exchange for a noninterest bearing note due in three years and a contract to purchase a fixed amount of merchandise from the supplier at a 10% discount from prevailing market prices over the next 3 years. The market rate for a note of this type is 10%. On issuing the note, Jole should record: Discount on Note Receivable Deferred Charge A. No No B. Yes No C. Yes Yes

Discount on Note Receivable Deferred Charge C. Yes Yes

On December 1, year 2, Money Co. gave Home Co. a $200,000, 11% loan. Money paid proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,310, beginning January 1, year 3. The repayments yield an effective interest rate of 11% at a present value of $200,000 and 12.4% at a present value of $194,000. Money does not elect the fair value option to record this financial asset. What amount of income from this loan should Money report in its year 2 income statement? A. $7,833 B. $2,005 C. $1,833 D. $0

Face amount of loan $200,000 Nonrefundable loan origination fee (6,000) Net amount loaned 194,000 Effective interest rate (yield) 12.4% 24,056 Outstanding one month (12/1/Y1 - 12/31/Y1) x 1/12 Interest income for year 1 2,005

On July 1, Lee Co. sold goods in exchange for a $200,000, 8-month, noninterest-bearing note receivable. At the time of the sale, the note's market rate of interest was 12°/o. What amount did Lee receive when it discounted the note at 10°/o on September 1? a. $194,000 b. $193,800 c. $190,000 d. $188,000

Face amount of note (non-interest bearing) 200,000 Bank Discount 10% x 6/12 = 5% (10,000) Proceeds from Bank 190,000

On August 1 year 1, Vann Corp's $500,000 1-year non-interest-bearing note due July 31 year 2 was discounted at Homestead Bank at 10.8%. Vann uses straight line method of amortizing bond discounts. What carrying amount should Vann report for notes payable in its December 31 year 1 balance sheet? A. 477,500 B. 446,000 C. 468,500

Face amount of note 500,000 Discount (500,000 x 10.8% x 12/12) (54,000) Proceeds at 8/1 when discounted - Total 446,000 S.L. Amortization of discount for Aug-Dec (54,000x5/12) 22,500 Carrying amount at 12/31 468,500

On December 31, Jet Co. received two $10,000 notes receivable from customers in exchange for services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 3% and payable at maturity. The note from Hart Corp., made under customary trade terms is due in 9 months and the note from Maxx, Inc., is due in 5 years. The market interest rate for similar notes on December 31 was 8%. The compound interest factors to convert future values into present values at 8% follow: Present value of $1 due in 9 months.944 Present value of $1 due in 5 years. 680 At what amounts should these two notes receivable be reported in Jet's December 31 balance sheet? Hart Maxx A. 9,440 6,800 B. 10,000 7,820

Hart Maxx B. 10,000 7,820 Hart Maxx Face amount of note 10,000 10,000 Interest rate 3% Annual interest 300 Term of note 5 Interest 1,500 Principal 10,000 Amount due at maturity 11,500 Present value factor x .0680 Present value of notes 10,000 7,820

On December 30, year 1, Bart, Inc. purchased a machine from Fell Corp. in exchange for a non-interest-bearing note requiring eight payments of $20,000. The first payment was made on December 30, year 1, and the others are due annually on December 30. At date of issuance, the prevailing rate of interest for this type of note was 11%. Present value factors are as follows: Period The present value of an PV of annuity in advance of 1 at 11% ordinary annuity of 1 at 11% 7 4.712 5.231 8 5.146 5.712

Non-interest bearing note at 12/30/Year 1 160,000 Less: Payment #1 paid same day - 12/31/Year 1 (20,000) Remaining due in 7 installments of 20,000 at the 140,000 end of each succeeding year Present value of note at 12/31/Year 1 = 20,000 x 4.712 = 94,240.

On September 1, Year 1, Cobb Co. issued a note payable to the National Bank in the amount of $900,000, bearing interest at 12%, and payable in three equal annual principal payments of $300,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, Year 2. At December 31, Year 2, Cobb should record accrued interest payable of

Original note amount 9/1/Year 1 900,000 Principal payment 9/1/Year 2 (300,000) Balance 600,000 Interest rate and time (12% x 4/12) x 4% Accrued interest payable 12/31/Year 2 24,000

Leaf Co. purchased from Oak Co. a $20,000, 8%, 5-year note that required five equal annual year-end payments of $5,009. The note was discounted to yield a 9% rate to Leaf. At the date of purchase, Leaf recorded the note at its present value of $19,485. What should be the total interest revenue earned by Leaf over the life of this note? a. $5,045 b. $5,560 c. $8,000 d $9,000

Total payments ($5,009 x 5) = 25,045 Principal paid at Present Value (19,485) Interest Revenue 5,560

Barr Co. has total debt of $420,000 and stockholders' equity of $700,000. Barr is seeking capital to fund an expansion. Barr is planning to issue an additional $300,000 in common stock, and is negotiating with a bank to borrow additional funds. The bank is requiring a debt-to-equity ratio of .75. What is the maximum additional amount Barr will be able to borrow?

Total stockholders' equity will equal $1,000,000 after the issuance of the additional common stock [$700,000 + $300,000]. If the debt/equity ratio is restricted to .75 then debt could be as much as $750,000 [debt/$1,000,000 = .75]. Maximum additional borrowing would be $330,000 [$750,000 possible debt - $420,000 debt already recorded].

1. Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable maturity. Loeb repaid each loan on its scheduled maturity date. Date Amount of Loan Maturity Date Term of Loan 11/1/Y1 $5,000 10/31/Y2: 1 year 2/1/Y2 $15,000 7/31/Year 2 6 months 5/1/Y2 $8,000 1/31/Year 3 9 months Loeb records interest expense when the loans are repaid. As a result, interest expense of $1,500 was recorded in year 2. If no correction is made, by what amount would year 2 interest expense be understated? a. $540 b. $620 c. $640 d. $720

a. $540 2,040 - 1,500 = 540 Loan Amount Term in Interest Paid Paid in Months Amount months at Maturity Year 2 $5,000 12 600 600 10 500 $15,000 6 900 900 6 900 8,000 9 720 - 8 640 1,500 2,040

On December 30, Year 1, Chang Co. sold a machine to Door Co. in exchange for a non-interest-bearing note requiring ten annual payments of $10,000. Door made the first payment on December 30, Year 1. The market interest rate for similar notes at date of issuance was 8%. Information on present value factors is as follows: Period Present value of $1 at 8% Present value of ordinary annuity of $1 at 8% 9 0.50 6.25 10 0.46 6.71 In its December 31, Year 1 balance sheet, what amount should Chang report as note receivable? a.$62,500 b.$67,100 c.$46,000 d.$45,000

a.$62,500 10,000 x 6.25 = 62,500

On March 15, Year 1, Ashe Corp. adopted a plan to accumulate $1,000,000 by September 1, Year 5. Ashe plans to make four equal annual deposits to a fund that will earn interest at 10% compounded annually. Ashe made the first deposit on September 1, Year 1. Future value and future amount factors are as follows: Future value of 1 at 10% for 4 periods 1.46 Future amount of ordinary annuity of 1 at 10% for 4 periods 4.64 Future amount of annuity in advance of 1 at 10% for 4 periods 5.11 Ashe should make four annual deposits (rounded) of: a.$215,500 b.$250,000 c.$195,700 d.$146,000

c.$195,700 Amount to be accumulated at 9-1-Year 5 1,000,000 Future amount of annuity in advance of 1 at 10% for 4 periods / 5.11 Annual amount to be deposited 195,695 Rounded to 195,700

On December 1, Year 1, Tigg Mortgage Co. gave Pod Corp. a $200,000, 12% loan. Pod received proceeds of $194,000 after the deduction of a $6,000 nonrefundable loan origination fee. Principal and interest are due in 60 monthly installments of $4,450, beginning January 1, Year 2. The repayments yield an effective interest rate of 12% at a present value of $200,000 and 13.4% at a present value of $194,000. What amount of accrued interest receivable should Tigg include in its December 31, Year 1, balance sheet? a.$0 b.$2,166 c.$2,000 d.$4,450

c.$2,000 200,000 x 12% x 1/12 = 2,000

The discount resulting from the determination of a note payable's present value should be reported on the balance sheet as a (an): a. Addition to the face amount of the note. b. Deferred charge separate from the note. c. Deferred credit separate from the note. d. Direct reduction from the face amount of the note.

d. Direct reduction from the face amount of the note.