Question

Camden Biotechnology began operations in September 2021. The following selected transactions relate to liabilities of the company for September 2021 through March 2022. Camden’s fiscal year ends on December 31. Its financial statements are issued in April.

2021

1. On September 5, opened checking accounts at Second Commercial Bank and negotiated a short-term line of credit of up to $25,000,000 at the bank's prime rate (9.5% at the time). The company will pay no commitment fees.
2. On October 1, borrowed $22 million cash from Second Commercial Bank under the line of credit and issued a five-month promissory note. Interest at the prime rate of 9% was payable at maturity. Management planned to issue 10-year bonds in February to repay the note.
3. Received $4,200 of refundable deposits in December for reusable containers used to transport and store chemical-based products.
4. For the September–December period, sales on account totaled $4,630,000. The state sales tax rate is 3% and the local sales tax rate is 3%. (This is a summary journal entry for the many individual sales transactions for the period.)
5. Recorded the adjusting entry for accrued interest.

2022

6. In March, paid the entire amount of the note on its March 1 due date, using proceeds from a February issuance of $20.0 million of 10-year bonds at face value, along with other available cash.
7. The storage containers covered by refundable deposits are expected to be returned during the first nine months of the year. Half of the containers were returned in March 2022.

Required:
1. Prepare the appropriate journal entries for items a-g.
2. Prepare the current and long-term liability sections of the December 31, 2021, balance sheet. Trade accounts payable on that date were $302,000.

Answer 1

1.

Journal entries:

No	Accounts name and explanation	Debit	Credit
a	No entry required.
b	Cash	22000000
	Notes payable		22000000
c	Cash	4200
	Liability for refundable deposits		4200
d	Accounts receivable	4907800
	Sales revenue		4630000
	Sales tax payable (3%+3%)*4630000		277800
e	Interest expense (22000000*9% * 3/12)	495000
	Interest payable		495000
f	Cash	20000000
	Bonds payable		20000000
	Note payable	22000000
	Interest payable		495000
	Interest expense (22000000*9% * 2/12)		330000
	Cash		21175000
g	Liability for refundable deposits (4200/2)	2100
	Cash		2100

.

2.

Camden Biotechnology
Partial balance sheet
Current liabilities:
Trade accounts payable	302000
Current portion of notes payable	2000000
Sales tax payable	277800
Interest payable	495000
Liability for refundable deposits	2100
Total current liabilities	3076900
Non-current liabilities:
Note payable to be refinances on long-term basis	20000000