Question

Camden Biotechnology began operations in September 2018. The following selected transactions relate to liabilities of the company for September 2018 through March 2019. Camden’s fiscal year ends on December 31. Its financial statements are issued in April.

2018

1. On September 5, opened checking accounts at Second Commercial Bank and negotiated a short-term line of credit of up to $23,000,000 at the bank’s prime rate (9.5% at the time). The company will pay no commitment fees.
2. On October 1, borrowed $20 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 $1,800 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 $4,740,000. 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.

2019

6. In February, issued $17.5 million of 10-year bonds at face value and paid the bank loan on the March 1 due date.
7. Half of the storage containers covered by refundable deposits were returned in March. The remaining containers are expected to be returned during the next six months.

Required:
1. Prepare the appropriate journal entries for 2018 and 2019 transactions.
2. Prepare the current and long-term liability sections of the December 31, 2018, balance sheet. Trade accounts payable on that date were $296,000.
  

Answer 1

a.

2018

No	Transaction	Account Titles	Debit	Credit
1	a	No entry required
2	b	Cash	20,000,000
		Notes payable		20,000,000
3	c	Cash'	1800
		Liability -refundable deposits		1800
4	d	Accounts receivable	4,740,000
		Sales revenue		4,455,600
		Sales tax payable [ 4740000*6%]		284400
5	e	Interest expense	450000
		Interest payable [ 20,000,000*9%*3/12]		450000

2019:

No	Transaction	Account Titles	Debit	Credit
1	a -1	Cash	17,500,000
		Bonds Payable		17,500,000
1	a-2	Notes Payable	20,000,000
		Interest Payable	450000
		Interest expense	300000
		Cash		20,750,000
2	b	Liability -refundable deposits	900
		Cash		900

b.

Balance Sheet(partial)
At December 31,2018
Current Liabilities
Accounts payable	296000
Current portion of notes payable (20 million - 17.5 million)	2,500,000
Sales tax payable	284400
Interest payable	450000
Liability -refundable deposits	1800
Total current liabilities	3532200
Long term liabilities
Notes payable to be refinanced on long term basis	17,500,000
	21,032,200