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Question: P7-15

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Intermediate Accounting (Kieso)
Found in: Page 375

Short Answer

(Expected Cash Flows) On January 1, 2017, Botosan Company issued a $1,200,000, 5-year, zero-interest bearing note to National Organization Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2018 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2018, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only $800,000 of the principal at maturity.

Instructions

(a) Prepare journal entries for both Botosan Company and National Organization Bank to record the issuance of the note on January 1, 2017. (Round to the nearest $10.)

(b) Assuming that both Botosan Company and National Organization Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note.

(c) Under what circumstances can National Organization Bank consider Botosan’s note to be impaired?

(d) Compute the loss National Organization Bank will suffer from Botosan’s financial distress on December 31, 2018. What journal entries should be made to record this loss?

An impairment loss of $317,410.40 will be reported on impairment.

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Step by Step Solution

Definition of Maturity Date

The date on which a borrower has to repay the loan amount along with the liable amount of interest to the lender is known as maturity date.

Journal Entries for Issuance

Botosan Company:

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Cash

$816,600

Discount on note payable

$383,400

Note payable

$1,200,000

(To record the note issued on discount)

National Organization Bank

Date

Accounts and Explanation

Debit $

Credit $

1 Jan 2017

Note receivable

$1,200,000

Discount on note receivable

$383,400

Note payable

$816,600

(To record the note issued on discount)

Note: Present value factor for 5 years @ 8% is 0.6805

Amortization Schedule

Date

Cash paid

Interest expenses 8%

Discount Amortized

Carrying amount of note

1 Jan 2017

0

$816,600

31 Dec 2017

0

$65,328

$65,328

$881,928

31 Dec 2018

0

$70,554.24

$70,554.24

$952,482.24

31 Dec 2019

0

$76,198.58

$76,198.58

$1,028,868.08

31 Dec 2020

0

$82,294.46

$82,294.46

$1,110,975.28

31 Dec 2021

0

$88,878.02

$88,878.02

$1,200,000

Total

383,400

Circumstances under which note is considered impaired

The note can be impaired in situations where the National bank organization cannot collect all the interest and principal due on the note.

Loss and its Journal Entries

Particular

Amount $

Carrying value on 31 Dec 2018

$952,482.24

Less:

Present value of $800,000 for 3 years @ 8%

(635,071.84)

Loss

$317,410.4

National Organization Bank:

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2018

Bad debt expenses

$317,410.40

Allowance for doubtful accounts

$317,410.40

Botosan Company will make no journal entry.

Most popular questions for Business-studies Textbooks

(Petty Cash, Bank Reconciliation) Bill Jovi is reviewing the cash accounting for Nottleman, Inc., a local mailing service. Jovi’s review will focus on the petty cash account and the bank reconciliation for the month ended May 31, 2017. He has collected the following information from Nottleman’s bookkeeper for this task.

Petty Cash

1. The petty cash fund was established on May 10, 2017, in the amount of $250.

2. Expenditures from the fund by the custodian as of May 31, 2017, were evidenced by approved receipts for the following.

Postage expenses

$33.00

Mailing Labels and Other Supplies

65.00

I.O.U from employees

30.00

Shipping charges

57.45

Newspaper advertising

22.80

Miscellaneous expenses

15.35

On May 31, 2017, the petty cash fund was replenished and increased to $300; currency and coin in the fund at that time totaled $26.40.

Bank Reconciliation

THIRD NATIONAL BANK

BANK STATEMENT

Disbursements

Receipts

Balance

Balance 1 May, 2017

$8,769

Deposits

$28,000

Note payment direct from customer ($30)

930

Check clearing during May

$31,150

Bank service charges

27

Balance 31 May, 2017

6,522

Nottleman’s Cash Account

Balance 1 May 2017

$8,850

Deposit during May 2017

31,000

Checks written during May 2017

(31,835)

Deposits in transit are determined to be $3,000, and checks outstanding at May 31 total $850. Cash on hand (besides petty cash) at May 31, 2017, is $246.

Instructions

(a) Prepare the journal entries to record the transactions related to the petty cash fund for May.

(b) Prepare a bank reconciliation dated May 31, 2017, proceeding to a correct cash balance, and prepare the journal entries necessary to make the books correct and complete.

(c) What amount of cash should be reported in the May 31, 2017, balance sheet?

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