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 $8,000,000 at the bank’s prime rate (9.5% at the time). The company will pay no commitment fees.

On October 1, borrowed $5 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.

Received $2,000 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 $4,880,000. 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 $4 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 $291,000.

Requirement 1:

a) Record opening of checking accounts at Second Commercial Bank and negotiated a short-term line of credit of up to $8,000,000 at the bank’s prime rate (9.5% at the time). The company will pay no commitment fees.

b) Record the borrowing of $5 million cash 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.

c) Record receipt of $2,000 of refundable deposits in December for reusable containers used to transport and store chemical-based products.

d) Record for the September–December period, sales on account totaled $4,880,000. The state sales tax rate is 3% and the local sales tax rate is 3%.

e) Recorded the adjusting entry for accrued interest.

f-1) Record issuance of $4.0 million of 10-year bonds.

f-2) Record the payment of the bank loan due on March 1

g) Record 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.

Requirement 2:

Prepare the current and long-term liability sections of the December 31, 2018, balance sheet. Trade accounts payable on that date were $291,000. (Enter your answers in whole dollars.)

                    Balance Sheet (partial)

                    At December 31, 2018

Current Liabilities :

Total current liabilities:

Long Term liablities

Answer 1

Requirement 1. Journal Entries for 2018 and 2019 trnasactions
a	No entry would be required as the company not yet borrowed the money
b	Cash	$5,000,000
	Notes Payable		$5,000,000
	(5- months, 9% note borrowed on October 1)
c	Cash	$2,000
	Liability for refundable deposit		$2,000
	(Refundable deposit received in December for reusable containers)
d	Accounts receivable	$5,172,800
	Sales Revenue		$4,880,000
	Sales Tax payable		$292,800
	(sales for Sept-December recorded)
	Sales tax payable = $4880000 x (3% + 3%)
	= $292800
	Accounts receivable = $4880000 + $292800
	= $5172800
e	Interest expense	$112,500
	Interest payable		$112,500
	(Interest on notes payable for 3 months)
	Interest expense = $5000000 x 9% x 3/12
	= $112500
f-1	Cash	$4,000,000
	Bonds Payable		$4,000,000
	(Issued 10 year bonds)
f-2	Notes payable	$5,000,000
	Interest payable	$112,500
	Interest expense	$75,000
	Cash		$5,187,500
	(Paid the bank loan on March 1)
	Interest expense = $5000000 x 9% x 2/12
	= $75000
g	Liability for refundable deposit	$1,000
	Cash		$1,000
	(half of the deposit returned in March)
Requirement 2. Current and Long term Liabilities on 31 December 2018
Current Liabilities:
	Accounts Payable	$291,000
	Current Portion of Notes payable	$1,000,000
	Sales Tax Payable	$292,800
	Interest Payable	$112,500
	Liability for refundable deposit	$2,000
Total Current Liabilities		$1,698,300
Long term Liabilities:
	Notes Payable	$4,000,000
Short term obligations that are expected to be refianances
on long term basis can be classified as long term liabilities.
In this case Notes payable to the extend of $4 million are expected
to be refinances by 10 year bonds. So this portion is classified as
long term liabilities and remaining portion ($5 million - $4 million)
$1 million is classified current liabilities