Question

Chapter 7 Homework:

1. On March 15, 2017, Birkshire Energy obtained a nine-month working capital loan from the First National Bank of Oglesby. The face amount of the note signed by the treasurer was $900,000. The interest rate charged by the bank was 10 percent. The bank made the loan on a discount basis. (Round your final answers to the nearest dollar).

(a.) Calculate the loan proceeds made available to Birkshire.
(b.) Calculate the amount of interest expense related to this loan during the six months ended June 30, 2017.
(c.) What is the amount of the current liability related to this loan to be shown in the June 30, 2017, balance sheet?

2. Claudette, Inc., provides warranties for many of its products. The January 1, 2017, balance of the Estimated Warranty Liability account was $77,000. Based on an analysis of warranty claims during the past several years, this year's warranty provision was estimated to be 0.8 percent of sales. During 2017, the actual costs of servicing products under warranty were $102,000, and sales were $10,600,000.

(a.) What amount of Warranty Expense will appear on the income statement for 2017?
(b.) What amount will be reported in the Estimated Warranty Liability account on the December 31, 2017, balance sheet?

Answer 1

SOLUTION :

Given That,

Face Value = $ 9,00,000

ROI (Intrest) = 10%

A. Calculation of Loan Proceeds :

Proceeds = Face Amount - Intrest

= $ 9,00,000 - $ 67,500

= $ 8,32,500

Therefore Proceeds = $ 8,32,500 .

Working :-

Calculation of the intrest :

Intrest = $ 900000 * 10/100 * 9/12

= $ 67,500

B. Calculation the amount of intrest

The Note was dated on March , 15 ,2017 i.e, 3.5 months (march 15 to the june )

Intrest = $ 900000 * 10/100 * 3.5/12

= $ 26,250

C. Calculation of currentliability of loan at the end of June , 30, 2017.

Current Liability = Fave value of the Loan - Discount

= $ 9,00,000 - (26,250 + 67,500 )

=$ 8,06,250.

2.

Given information :

a) Calculation of warrenmty expense amount appear on the Income Statement for 2017 :

Warrenty provision Estimated for the year 2017 = 0.8% of sales.

Annual Sales = $ 10,600,000

Provision Amount = $10,600,000 * 0.8 %

= $ 84,800 .

b)

calculation of Estimated Warrenty liability Account on the December 31,2017 Balance Sheet :

Warrenty claims for the dec,31 ,2017 = Opening balance + Current year provision - Actual Sales

= $77,000 + $ 84,800 - $ 102,000

= $ 59800 .

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