Question

Use the following to answer questions 20-21:

LeGrand Co. sells office supplies and equipment to law firms and other high-end clients. Their accountant has provided you with the following Balance Sheet for the company for 2005.

LeGrand Co.
Balance Sheet
As of December 31, 2005
Assets
Cash			$     112,560
Cash Equivalents			$      76,400
Expansion Fund			$     720,000
Patents			$      16,000
Inventory			$     310,175
Land			$     500,000
Held for Sale			$     645,000
Net Buildings (Accumulated Depr. is $90,000)			$     956,000
Notes Receivable			$     113,500
A/R			$     212,600
Allowance for Bad Debts			$     (31,890)
Net Equipment (Accumulated Depr is $35,000)			$     550,000
Prepaid Insurance			$      17,525
	Total Assets		$ 4,197,870
Liabilities and Stockholder's Equity
Accounts Payable			$     260,000
Additional Paid-In Capital			$ 1,690,000
Common stock (50,000 share of $1 par)			$     50,000
Income Tax Payable			$      96,000
Loan Payable			$     575,000
Bonds Payable			$     650,000
Mortgage Payable			$     356,000
Preferred stock (5,000 shares of $20 par)			$     100,000
Retained Earnings			$     315,870
Treasury Stock			$     (90,000)
Unearned Revenue			$      72,000
Wages Payable			$     123,000
	Total Liabilities and Equity		$ 4,197,870

The company's loan is not due for 3 more years. However, they are required to pay off 20% of their mortgage each year. The company has decided that they should list their PPE accounts at historical cost, rather than as net amounts. They have also decided to combine all of the accumulated depreciation into one account on the balance sheet. LeGrand issued their $650,000 bond at face value on October 1st. The bond is semi-annual (i.e. LeGrand must pay interest every 6 months) with an 8% annual interest rate. When the auditor checked the numbers given above, they found that LeGrand had yet not recognized any interest expense on the bond.

20.	(14 points) What adjusting entries, if any, does LeGrand Co. need to make for the interest on their new bond? LeGrand’s tax rate is 30%. (AC 10 & 11)

21.	(54 points) Create a multi-step balance sheet in good form for LeGrand. Make sure that you include any adjustments you made in the previous problem. (AC 17 & 18)

Answer 1

20. Adjustment entries for the interest on their new bond

Account Name	Debit	Credit	Narration/Description
Interest Expense	13,000		Interest accrued on Bonds @ 8% p.a
Interest Payable		13,000	Interest accrued on Bonds @ 8% p.a
			(650,000 * 0.08 * 3/12)
Income Tax Payable	3,900		Income Tax on Interest expense reversed, as the liability has been reduced
Retained earnings		3,900	Income Tax on Interest expense reversed, as the liability has been reduced
			(13,000 * 30%)
Retained earnings	13,000		Interest expense charged to retained earnings
Interest Expense		13,000	Interest expense charged to retained earnings

Multi Step Balance Sheet

Notes:-

• Notes Receivable are assumed to be due post 1 year, and hence considered to be non current Asset
• Mortgage payable due in next one year is taken as current liabilities and remaining in non current liabilities
• All the journal entries in the previous question have been adjusted in the Balance sheet.

Particulars	Amount ($)
Assets
Current Assets
Cash	1,12,560
Cash Equivalents	76,400
Inventory	3,10,175
Held for sale	6,45,000
A/R	2,12,600
Allowance for Bad Debts	-31,890
Prepaid Insurance	17,525
Total Current Assets	13,42,370
Non Current Assets
Expansion Fund	7,20,000
Patents	16,000
Land	5,00,000
Buildings	10,46,000
Equipment	5,85,000
Accumulated Depreciation	-1,25,000
Notes Receivable	1,13,500
Total Non Current Assets	28,55,500
Total Assets	41,97,870
Liabilities and stockholders Equity
Current Liabilities
Accounts Payable	2,60,000
Income Tax Payable	92,100
Mortgage payable	71,200
Unearned Revenue	72,000
Wages Payable	1,23,000
Interest Payable	13,000
Total Current Liabilities	6,31,300
Non Current Liabilities
Loan Payable	5,75,000
Bonds Payable	6,50,000
Mortgage payable	2,84,800
Total Non-Current Liabilities	15,09,800
Stockholders Equity
Common Stock	50,000
Additional Paid in capital	16,90,000
Treasury Stock	-90,000
Retained earnings	3,06,770
Preferred Stock	1,00,000
Total Stockholders Equity	20,56,770
Total Liabilities and Stockholders Equity	41,97,870