Question

5a. Trapezoid Company signed a short-term, one year, note to borrow $10,000 from Cash Bank on April 1, 2017. The interest on the note was 12 percent per year. The principal and interest on the note will be payable on the maturity date of March 31, 2018. What entry should Trapezoid Company make on: April 1, 2017; December 31, 2017; and March 31, 2018?

5b. Pragmatic Company manufactures a specialty car wax that sells for $10 per can. Pragmatic Company’s fixed overhead costs amounts to $200,000 per year. The variable cost of producing one can of car wax is $6. What is Pragmatics’ contribution margin in dollars per can? What is the firm’s contribution margin percentage? How many cans will the firm have to produce to break even? How many cans will Pragmatic have to sell to generate an operating profit of $100,000?

Answer 1

5a.

Date	Account Titles and Explanation	Debit	Credit
April 1, 2017	Cash	$10,000
	Notes payable		$10,000

Date	Account Titles and Explanation	Debit	Credit
December 31, 2017	Interest expense ($10,000*12%*9/12)	$900
	Interest payable		$900

Date	Account Titles and Explanation	Debit	Credit
March 31, 2018	Interest expense ($10,000*12%*3/12)	$300
	Interest payable		$300

Date	Account Titles and Explanation	Debit	Credit
March 31, 2018	Notes payable	$10,000
	Interest payable	$1,200
	Cash		$11,200

5b.

Pragmatics’ contribution margin in dollars per can = Selling price per can - Variable costs per can

= $10 - $6

= $4

The firm’s contribution margin percentage = Contribution margin per can / Selling price per can

= $4 / $10

= 0.4

Cans to be sold to break-even = Fixed overhead costs / Contribution margin per can

= $200,000 / $4

= 50,000

Cans to be sold to generate the operating profit = Fixed overhead costs / Contribution margin percentage

= $200,000 / 0.4

= $500,000