BRIEF EXERCISE 10-1
(a) A note payable due in two years is a long-term liability, not a current
liability.
(b) $20,000 of the mortgage payable is a current maturity of long-term debt.
This amount should be reported as a current liability.
(c) Interest payable is a current liability because it will be paid out of
current assets in the near future.
(d) Accounts payable is a current liability because it will be paid out of
current assets in the near future.
BRIEF EXERCISE 10-9
Long-term liabilities
Bonds payable..................................................
Less: Discount on bonds payable .................
Notes payable ...................................................
Total long-term liabilities .........................
$700,000
28,000
$672,000
80,000
$752,000
EXERCISE 10-1
(a) June 1
Cash ..........................................................
Notes Payable ...................................
(b) June 30 Interest Expense
($15,000 X .08 X 1/12)............................
Interest Payable ................................
(c) Interest payable accrued each month .....................
Number of months from borrowing
to year end .............................................................
Balance in interest payable account ........................
(d) Jan. 1
Notes Payable ...........................................
Interest Payable ........................................
Cash...................................................
15,000
15,000
100
100
$100
X 7
$700
15,000
700
15,700
EXERCISE 10-7
(a) Nov.
(b) Dec. 31
(c) Mar. 31
Cash (6,300 X $28) ................................
Unearned Sales Revenue ...............
176,400
Unearned Sales Revenue .....................
Sales Revenue
($176,400 X 1/12).........................
14,700
Unearned Sales Revenue .....................
Sales Revenue
($176,400 X 3/12).........................
44,100
176,400
14,700
44,100
EXERCISE 10-8
2012
(a) Aug. 1
(b) Dec. 31
2013
(c) Aug. 1
(d) 2022
Aug. 1
Cash .......................................................
Bonds Payable ..............................
600,000
Interest Expense ...................................
Interest Payable
($600,000 X 7% X 5/12) ...............
17,500
600,000
17,500
Interest Expense
($600,000 X 7% X 7/12) .......................
Interest Payable ....................................
Cash ($600,000 X 7% X 12/12) ......
24,500
17,500
Interest Expense
($600,000 X 7% X 7/12) .......................
Interest Payable ....................................
Cash ($600,000 X 7% X 12/12) ......
24,500
17,500
Bonds Payable
Cash
42,000
42,000
600,000
600,000
EXERCISE 10-10
(a) The General Electric bonds were issued at a premium and the Boeing
bonds were issued at a discount.
(b) The prices of the two bonds differed because bond price is based on the
market rate of interest not the stated rate of interest. Market interest
rates must have been different when the two bonds were issued causing
the selling prices to differ.
(c) Cash (111.12% X $800,000) ....................................
Bonds Payable .................................................
Premium on Bonds Payable ............................
888,960
Cash (99.08% X $800,000) ......................................
Discount on Bonds Payable ..................................
Bonds Payable .................................................
792,640
7,360
800,000
88,960
800,000
*EXERCISE 10-19
2011
(a) Dec. 31
2012
(b) Dec. 31
2026
(c) Dec. 31
Cash ......................................................
Discount on Bonds Payable ................
Bonds Payable ..............................
288,000
12,000
Interest Expense ..................................
Cash ($300,000 X 8%) ...................
Discount on Bonds Payable
($12,000 X 1/15) ..........................
24,800
Bonds Payable .....................................
Cash ..............................................
300,000
300,000
24,000
800
300,000
BYP 10-2
(a)
(1) Current ratio
COMPARATIVE ANALYSIS PROBLEM
Hershey
Tootsie Roll
$1,385,434
= 1.52:1
$910,628
$211,878
= 3.78:1
$56,066
Based on the current ratio, Tootsie Roll is more liquid than Hershey.
Tootsie Roll’s current ratio is 249% larger than Hershey’s. Tootsie Roll
appears much more able to meet its current obligations.
(b)
Hershey
(1) Debt to total
assets
(2) Times interest
earned
**$56,066 + $129,696
$2,914,692
$3,675,031
= 79.3%
Tootsie Roll
$185,762 **
$838,247
= 22.2%
$435,994 + $235,137 + $91,336
$53,475 + $10,704 + $243 ***
$91,336
= 8.3 times
$243
= 265.1 times
***See note 6
The higher the percentage of debt to total assets, the greater the risk that
a company may be unable to meet its maturing obligations. Tootsie
Roll’s 2009 debt to total assets ratio was considerably less than
Hershey’s; thus, Tootsie Roll would be considered significantly better
able to meet its obligations. The times interest earned ratio provides an
indication of a company’s ability to meet interest payments. Since
Tootsie Roll’s times interest earned ratio is approximately 32 times as
large as Hershey’s, Tootsie Roll had a much greater ability to meet its
interest payments in 2009 than Hershey. Tootsie Roll appears to be
significantly more solvent.