Question

Akerman Techonology Corp. is preparing its SFP at 31 December 20X5. The following items are under consideration:

a. Rent received in advance for the first quarter of 20X6, $20,000.

b. Note payable, long term, $100,000. This note was issued on 1 July 20X5 and will be paid in five equal instalments. The first instalment, $20,000, will be paid 1 January 20X6. Interest will accrue at the rate of 8% per annum.

c. $400,000 bonds payable bearing interest of 8% per annum, maturing 31 December 20X9. Unamortized premium amounted to $10,000 at the end of 20X5.

d. Long term note payable, $250,000, issued on 30 June 20X2 and maturing 30 June 20X6. Interest at 8% must be paid 30 June each year.

e. Restriction for bond sinking fund, $20,000; this restriction is required by provisions of the bond agreement.

f. On 28 January 20X6, prior to finalizing the 20X5 statements, the company issued new preferred shares to a private equity fund for $1,400,000. The new shares increased the equity base of the company by almost 30%. The fund will be used to retire existing long term debt and for new production processes.

 

Required:

Show, with appropriate captions, how each of these items should be reported on the 31 December 20X5 SFP. If amounts are not quantifiable, describe the appropriate reporting that would be followed when numbers are available. Round amounts to the nearest $100.

Answer 1

a.     Current liabilities:

            Rent revenue collected in advance (or unearned

                    rent revenue).............................................................                           $20,000

 

b.    Current liabilities:

            Note payable (current portion of long term note)............                           $20,000

       Long-term liabilities:

            Note payable (less current instalment of $20,000)..........                           $66,243*

       * Discounted present value of the remaining four payments @ 8%

 

c.     Long-term liabilities:

            Bonds payable, 8%, due date (maturity amount plus

            unamortized premium of $10,000)..................................                         $410,000

 

d.   Current liabilities:

      Accrued interest payable.................................................                           $10,000

      Note payable....................................................................                         $250,000

The note’s principal amount is due within the coming year and therefore becomes a current item. Interest must be accrued for the ½ year from 30 June 20X5 to 31 December 20X5.

 

e.     Retained earnings:

            Reserve for bond sinking fund........................................                           $20,000

 

f.     Note to the financial statements:

       Subsequent event:

On 28 January 20X6, the company issued a new class of preferred shares to a private equity investment company for $1,400,000. The funds will be used to retire existing long-term debt and for acquiring and installing new production processes.