1.On November 1, 20xx Mission Beach Surf Shop borrows $200,000, by signing a 90-

Question

1.On November 1, 20xx Mission Beach Surf Shop borrows $200,000, by signing a 90-Day, 9% Note Payable. In proper order and form, prepare the following journal entries. (Assume a 360 day year.)

Journal Entry Required at Issuance of Note Payable

Journal Entry Required to accrue interest at the end of the year

Journal Entry Required at the Note’s maturity date

2.In late December, Nero Fashions of La Jolla guarantees the $110,000 debt of a supplier. It is unlikely the supplier will default on the debt. Decide and take the appropriate accounting action concerning this contingent liability.

3.Nate McCall works for The Prescott Company. For the pay period ended Nov 30, his gross earnings are $3,000. McCall has $800 deducted for federal income taxes and $200 for state income taxes from each paycheck. Additionally, a $35 premium for his health care insurance and $10 donation for the United Way are deducted. McCall pays FICA Social Security taxes at a rate of 6.2% and FICA Medicare taxes at a rate of 1.45%. He has not earned enough this year to be exempt from any FICA taxes. Journalize the accrual of salaries expense of McCall’s wages. Round all calculations to the nearest whole dollar.

4.On Nov 1, The Prescott Company borrows $5,000 cash from a bank in return for a 60 day, 12%, $5,000 note. Record the note’s issuance on Nov 1 and it repayment on Dec 31.

5.For this calendar year, The Olsen Machine Company’s net income is $1,000,000, it interest expense is $275,000, and its income taxes expense is $225,000. Calculate Olsen’s times interest earned ratio to four decimal places.

6.The following items appear on the Balance Sheet of a company with a one-year operating cycle. Identify the classification of each item as follows: Current Liability-CL, Long-Term Liability-LTL, Not a Liability-N.

Note Payable(Due in 6 Months)_____

Sales Taxes Payable_____

Note Payable(Due in 5 Years) _____

Accounts Receivable_____

Current Portion of L-T Debt _____

Wages Payable _____

Explanation / Answer

1) Mission Beach Surf Shop: ,Nov 1,20xx Cash 200,000 Notes payable 200,000 (issue of 90 day 9% note) Dec 31, 20xx Interest expense (200000*9%*2/12) 3,000 Interest payable 3,000 (to accrue 2 months interest on the note) Jan 30. 20xx Interest expense 1,500 Interest payable 3,000 Notes payable 200,000 Cash 204,500 (payment of the 90 day note payable along with interest) 2) Nero Fashions of La Jolia: A note to disclose the contingent liability has to be given: Note XX: Contingent liabilities: The company has guaranteed the debt obligation of a supplier for $110,000. No liability is likely to arise on this gurantee. 4) Prescott Company: 1-Nov Cash 5,000 (amount borrowed on a note from bank) 31-Dec Note payable 5,000 Interest Expense (5000*12%*2/12) 100 Cash 5,100 (payment of the note with interest) Note: if the firm accounts for accrual of interest monthly, the debit of $100 will be interest payable account) 5) EBIT = 1000000+275000+225000 = 1500000 Times Interest Earned Ratio = EBIT/Interest expense =1500000/275000 = 5.4545 6) Note payable - current liability Sales tax payable - current liability Note payable = due in 5 years - long term liability Accounts receivable - not a liability Current portion of LT debt- current liability Wages payable - current liability

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