Ermlar Corporation sells rock-climbing products and also operates an indoor climbing facility for climbing enthusiasts. During the last part of 2014, Ermlar had the following transactions related to notes payable.

Sept. 1  Issued a $12,000 note to Lippert to purchase inventory. The 3-month note payable bears interest of 6% and is due December 1. (Ermlar uses a perpetual inventory system.) 

Sept. 30  Recorded accrued interest for the Lippert note. 

Oct. 1  Issued a$16,500, 8%, 4-month note to Shanee Bank to finance the purchase of a new climbing wall for advanced climbers. The note is due February 1. 

Oct. 31  Recorded accrued interest for the Lippert note and the Shanee Bank note. 

Nov. 1  Issued a $26,000 note and paid$8,000 cash to purchase a vehicle to transport clients to nearby climbing sites as part of a new series of climbing classes. This note bears interest of 6% and matures in 12 months. 

Nov. 30  Recorded accrued interest for the Lippert note, the Shanee Bank note, and the vehicle note. 

Dec. 1 Paid principal and interest on the Lippert note. 

Dec. 31 Recorded accrued interest for the Shanee Bank note and the vehicle note.

Instructions

(b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense accounts. (Use T-accounts.)

Ermlar Corporation sells rock-climbing products and also operates an indoor climbing facility for climbing enthusiasts. During the last part of 2014, Ermlar had the following transactions related to notes payable.

Sept. 1  Issued a $12,000 note to Lippert to purchase inventory. The 3-month note payable bears interest of 6% and is due December 1. (Ermlar uses a perpetual inventory system.) 

Sept. 30  Recorded accrued interest for the Lippert note. 

Oct. 1  Issued a$16,500, 8%, 4-month note to Shanee Bank to finance the purchase of a new climbing wall for advanced climbers. The note is due February 1. 

Oct. 31  Recorded accrued interest for the Lippert note and the Shanee Bank note. 

Nov. 1  Issued a $26,000 note and paid$8,000 cash to purchase a vehicle to transport clients to nearby climbing sites as part of a new series of climbing classes. This note bears interest of 6% and matures in 12 months. 

Nov. 30  Recorded accrued interest for the Lippert note, the Shanee Bank note, and the vehicle note. 

Dec. 1 Paid principal and interest on the Lippert note. 

Dec. 31 Recorded accrued interest for the Shanee Bank note and the vehicle note.

Instructions

(a) Prepare journal entries for the transactions noted above.

(b) Post the above entries to the Notes Payable, Interest Payable, and Interest Expense accounts. (Use T-accounts.)

(c) Show the balance sheet presentation of notes payable and interest payable at December 31. (d) How much interest expense relating to notes payable did Ermlar incur during the year?

On May 15, Criqui Outback Clothiers borrowed some money on a 4-month note to provide cash during the slow season of the year. The interest rate on the note was 8%. At the time the note was due, the amount of interest owed was $480.

Instructions

(a) Determine the amount borrowed by Criqui.

(b) Assume the amount borrowed was$18,500. What was the interest rate if the amount of interest owed was $555?

(c) Prepare the entry for the initial borrowing and the repayment for the facts in part (a).

Graves Company borrows $90,000 on July 1 from the bank by signing a$90,000, 7%, 1-year note payable. Prepare the journal entries to record (a) the proceeds of the note and (b) accrued interest at December 31, assuming adjusting entries are made only at the end of the year.

Whitson Corporation issues $400,000 of 9%, 5-year bonds on January 1, 2014, at 104. If Whitson uses the effective-interest method in amortizing the premium, will the annual interest expense increase or decrease over the life of the bonds? Explain.

Glenda Hope is discussing the advantages of the effective-interest method of bond amortization with her accounting staff. What do you think Glenda is saying?

Knobler Corporation issues $200,000 of 6%, 5-year bonds on January 1, 2014, at 103. Assuming that the straight-line method is used to amortize the premium, what is the total amount of interest expense for 2014?

Explain straight-line method of amortizing discount and premium on bonds payable.

Goins Corporation issued a $50,000, 10%, 10-year installment note payable on January 1, 2014. Payments of$8,137 are made each January 1, beginning January 1, 2015.

Instructions

(a) What amounts should be reported under current liabilities related to the note on December 31, 2014?

(b) What should be reported under long-term liabilities?

What criteria must be met before a contingency must be recorded as a liability? How should the contingency be disclosed if the criteria are not met?

Nance Co. receives $280,000 when it issues a$280,000, 6%, mortgage note payable to finance the construction of a building at December 31, 2014. The terms provide for semiannual installment payments of $14,285 on June 30 and December 31.

Instructions

Prepare the journal entries to record the mortgage loan and the first two installment payments.

What are the implications for analysis if a company has significant operating leases?

Gomez Company issued $380,000, 7%, 10-year bonds on January 1, 2014, for$407,968. This price resulted in an effective-interest rate of 6% on the bonds. Interest is payable annually on January 1. Gomez uses the effective-interest method to amortize bond premium or discount.

Instructions

Prepare the journal entries (rounded to the nearest dollar) to record:

(a) The issuance of the bonds.

(b) The accrual of interest and the premium amortization on December 31, 2014.

(c) The payment of interest on January 1, 2015.

Norman Corporation has a current ratio of 1.1. Tim has always been told that a corporation’s current ratio should exceed 2.0. The company maintains that its ratio is low because it has a minimal amount of inventory on hand so as to reduce operating costs. Norman also has significant available lines of credit. Is Tim still correct? What do some companies do to compensate for having fewer liquid assets?