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 On September 5, opened checking accounts at Second Commercial Bank and negotiated a short-term line of credit of up to $15,000,000 at the bank's prime rate (10.5% at the time). The company will pay no commitment fees. On October 1, borrowed $12 million cash from Second Commercial Bank under the line of credit and issued a five-month promissory note. Interest at the prime rate of 10% was payable at maturity. Management planned to issue 10-year bonds in February to repay the note. Received $2,600 of refundable deposits in December for reusable containers used to transport and store chemical-based products. For the September–December period, sales on account totaled $4,100,000. 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.) Recorded the adjusting entry for accrued interest. 2019 In February, issued $10 million of 10-year bonds at face value and paid the bank loan on the March 1 due date. 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 $252,000.

Answer 1

SOLUTION

1.

S.No.	Account titles and Explanation	Debit ($)	Credit ($)
	2018
A.	No entry required
B.	Cash	12,000,000
	Notes payable		12,000,000
C.	Cash	2,600
	Liability for refundable deposits		2,600
D.	Accounts receivable	4,346,000
	Sales revenue		4,100,000
	Sales tax payable [(3%+3%)*$4,100,000]		246,000
E.	Interest expense (10% * $12,000,000 * 3/12)	300,000
	Interest payable		300,000
	2019
F.	Cash	10,000,000
	Bonds payable		10,000,000
	Notes payable	12,000,000
	Interest payable	300,000
	Interest expense (10% * 12,000,000 * 2/12)	200,000
	Cash		12,500,000
G.	Liability for refundable deposits (1/2 * 2,600)	1,300
	Cash		1,300

2.

	Amount ($)
Current Liabilities
Accounts payable	252,000
Current portion of notes payable*	2,000,000
Sales tax payable	246,000
Interest payable	300,000
Liability for refundable deposits	2,600
Total current liabilities	2,800,600
Long-term Liabilities
Note payable to be refinances on long-term basis	10,000,000

*Short-term obligations that are expected to be refinanced on a long-term basis can be reported as non-current if:

-  The firm intends to refinance on a long-term basis , and

- The firm has demonstrated the ability to refinance on an long-term basis