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Chapter 5: Q20Q. (page 238)

The creditors of Chester Company agree to accept promissory notes for the amount of its indebtedness with a proviso that two-thirds of the annual profits must be applied to their liquidation. How should these notes be reported on the balance sheet of the issuing company? Give a reason for your answer

Short Answer

Expert verified

Promissory notes must bereflected in the balance sheet as a long-term liability.

Step by step solution

01

Definition of Creditors

All the individuals or companies from which the business entity has borrowed money or purchased inventory are creditors. These are reported as liabilities of the business entity.

02

Reporting Promissory Notes

The business entity must report the promissory note as long-term liabilities in the company’s balance sheet. The balance sheet must also include the term related to a promissory note. At the end of each year after calculation of the profit. The business entity must transfer the promissory note balance from long-term liability to current liability, equal to two-thirds of profit generated. Such transfer must be followed until the business entity fully liquidates its promissory note.

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Most popular questions from this chapter

A comparative balance sheet for Shabbona Corporation is presented below.

Particular

December 31

2017

2016

Assets

Cash

\(73,000

\)22,000

Accounts receivable

82,000

66,000

Inventory

180,000

189,000

Land

71,000

110,000

Equipment

260,000

200,000

Accumulated depreciation – Equipment

(69,000)

(42,000)

Total

\(597,000

\)545,000

Liabilities and stockholder’s equity

Account payable

\(34,000

\)47,000

Bonds payable

150,000

200,000

Common stock (\(1 par)

214,000

164,000

Retained earnings

199,000

134,000

Total

\)597,000

\(545,000

Additional information:

1. Net income for 2017 was \)125,000. No gains or losses were recorded in 2017.

2. Cash dividends of \(60,000 were declared and paid.

3. Bonds payable amounting to \)50,000 were retired through issuance of common stock.

Instructions

(a) Prepare a statement of cash flows for 2017 for Shabbona Corporation.

(b) Determine Shabbona Corporation’s current cash debt coverage, cash debt coverage, and free cash flow. Comment on its liquidity and financial flexibility.

BE5-2 (L03) Koch Corporation’s adjusted trial balance contained the following asset accounts at December 31, 2017: Cash \(7,000, Land \)40,000, Patents \(12,500, Accounts Receivable \)90,000, Prepaid Insurance \(5,200, Inventory \)30,000, Allowance for Doubtful Accounts \(4,000, and Equity Investments (trading) \)11,000. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.

5. A company has purchased a tract of land and expects to build a production plant on the land in approximately five years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:

(a) land expense.

(b) property, plant, and equipment.

(c) an intangible asset.

(d) a long-term investment.

(L03) (Preparation of a Classified Balance Sheet, Periodic Inventory) Presented below is a list of accounts in alphabetical order.

Accounts Receivable-Inventory-Ending

Accumulated Depreciation—Buildings-Land

Accumulated Depreciation—Equipment Land for Future Plant Site

Accumulated Other Comprehensive Income - Loss from Flood

Advances to Employees- Noncontrolling Interest

Advertising Expense - Notes Payable (due next year)

Allowance for Doubtful Accounts - Paid-in Capital in Excess of Par— preferred stock

Bond Sinking Fund -Patents

Bonds Payable - Payroll Taxes Payable

Buildings - Pension Liability

Cash (in bank) - Petty Cash

Cash (on hand) - Preferred Stock

Cash Surrender Value of Life Insurance -Premium on Bonds Payable

Commission Expense- Prepaid Rent

Common Stock- Purchase Returns and Allowances

Copyrights - Purchases

Debt Investments (trading)- Retained Earnings

Dividends Payable- Salaries and Wages Expense (sales)

Equipment - Salaries and Wages Payable

Freight-In Sales- Discounts

Gain on Disposal of Equipment- Sales Revenue

Interest Receivable - Treasury Stock (at cost)

Inventory—Beginning Unearned Subscriptions Revenue

Instructions Prepare a classified balance sheet in good form. (No monetary amounts are to be shown.)

What is the purpose of a free cash flow analysis?
See all solutions

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