Debt Classification

Unit 5 Assignment

Exercise 13-5 (Debt Classification) Presented are four different situations related Mckee plc debt obligations. Mckee’s next financial reporting date is December 31,2018. The financial statements are authorized for issuance on March 1, 2019.

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  1. Mckee has a debt obligation maturing on December 31, 2021. The debt is callable o n demand by the lender at any time.
  2. Mckee also has a long -term obligation due on December 1, 2020. On November 10, 2018, it breaches a covenant on its debt obligation and the loan becomes due on demand. An agreement is reached provide a waiver of the breach on December 8, 2018.
  3. Mckee has a long-term obligation of $400,000, which maturing over 4 years in the amount of $ 100,000 per year. The obligation is dated November 1, 2018, and the first maturity date is November 1, 2019.
  4. Mckee has a short-term ion due February 15, 2019. Its lender agrees to extend the maturity date loan to February 15, 2021. The Agreement for extension is sinigned on January 15, 2019.

Instruction

Indicate how each of these debt obligations is reported on Mckee’s statement of financial position on December 31, 2018.

Exercise 13-13 (Warranties) Early in 2019, Sheryl Crow Equipment sold 500 Rollomatics during 2019 at $6,000 each. During 2019, Crow spent $ 20,000 servicing the 2year assurance warranties that accompany the Rollomatic. All applicable transaction are on a cash basis.

Instruction

  1. Prepare 2019 entries Cow. Assume estimate the total cost servicing the warranties will be $55,000 for 2 years.
  2. Prepare 2019 entries for Crow assuming that the warranties are not an integral part of the sale (service-type warranty). Assume that of the sales total $56,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $55,000 for 2 years. Estimate revenues to be recognizes on a straight- line basis.

Exercise 14-5 (Entries for Bond Transactions) Assume the same information as in E14.4 except that the bonds were issued 84.95 to yield 12%.

Instruction

  1. The issuance of the bonds.
  2. The payment of interest and related amortization on July 1, 2019.
  3. The accrual of interest and the related amortization on December 31, 2019.

Here is the E14.4 Foreman Cleaners issued $800,000 of 10%, 20year old bonds on January 1, 2019 at 119.792 to yield 8%. Interest is payable semiannually on July and January1.

Exercise 14-11 (Entries for Zero-Interest-Bearing Notes) On January 1, 2019 Mclean AG makes the the following acquisitions.

  1. Purchases land having a fair value of $300,000 by issuing a 5- year, zero interest bearing promissory note in the face amount of %505,518.
  2. Purchases equipment by issuing 6%, 8 year promissory note having a maturity value of $400,000 (interest payable annually).

The company has to pay 11% interest for funds from its bank.

Instructions

  1. Record the two journal entries that should be recorded by Mclean AG for the purchases on January 1, 2019.
  2. Record the interest at the end of the first on both notes.

Exercise 15-6 (Share Issuances and Repurchase) Loxley Corporation is authorized to issue 50,000 s shares of $10 par value ordinary shares. During 2019, Loxley took part in the following selected the transactions.

  1. Issued 5,000 shares at $ 45 shares, less costs related to the issuance of the shares totaling $7,000.
  2. Issuance 1,000 shares for land appraised at $50,000. The shares were actively traded on a national securities exchange at approximately $46 per share on the date of issuance.
  3. Purchased 500 treasury shares at $44 per share. The treasury shares purchased were issued in 2018, at $40 per share.

Instruction

  1. Prepare the journal entry to record item 1.
  2. Prepare the journal entry record item 2.
  3. Prepare the journal entry record item 3 using the cost method.

Exercise15-7 (Effect of Treasury Share Transactions on Financials) Goosen SA has outstanding 40,000 shares of $5 par ordinary shares which had been issued at $30 per share. Goosen entered into the following transactions.

  1. Purchased 5,000 treasury shares at $45 per share.
  2. Resold 500 of the treasury shares.
  3. Resold 2,000 of the treasury shares $49 per share.

Instructions

Use the following code to indicate the effect of the three transactions has on the financial statement categories listed in the table below, assuming Goosen SA uses the cost method:1- increase: D= decrease; and NE= No effect.

Share                      Retained                                Net

#              Assets     Liabilities     Equity               Premium                Earnings                                 Income

1

2

3

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