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 $19,000,000 at the bank’s prime rate (12.5% at the time). The company will pay no commitment fees.
2. On October 1, borrowed $16 million cash from Second Commercial Bank under the line of credit and issued a five-month promissory note. Interest at the prime rate of 12% was payable at maturity. Management planned to issue 10-year bonds in February to repay the note.
3. Received $3,500 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 $4,140,000. 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 $12.4 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.

Answer 1

Calculation of the rate of sales tax      
Total Sales Tax Rate              
Sales Tax Rate (State)+Sales tax rate(Local)      
3%+3%                  
$3,500       6%                  
Sales Tax                  
Accounts Receivable *Rate of Tax          
$4140000*6%              
$248,400                  
Computation of Accounts Receivable      
Sales Revenue+Sales Tax Payable          
$4140000+$248400              
$4,388,400                  
Computation of Accrued Interest          
Interest Accrued              
Notes payable *Rate of Interest*Number of Months/12
$16000000*12%*3/12              
$480,000                  
Computation of interest Expense          
Interest Expense              
Notes Payable *Rate of Interest *Number of Months/12
$16000000*12%*2/12              
$320,000                  
Computation of cash to be piad          
Interest Expense +Interest Payable+Notes Payable  
$320000+$480000+$16000000          
$16,800,000                  
Computation of the amount of refundable deposits paid
Refundable Deposits paid          
Total Refundable Deposits*1/2          
$3500/2                  
$1,750                  
1   No Journal Entry will be passed for the negotiation of short term LOC.                  
Journal Entry                      
2   Date   Account Title   Dr Amount   Cr Amount              
1st Oct 2018   Cash   $16,000,000                  
To Note Payable       $16,000,000              
to record the issunace of               Calculation of the rate of sales tax
promissory note               Total Sales Tax Rate  
Sales Tax Rate (State)+Sales tax rate(Local)
3       Cash   $3,500           3%+3%      
To Refundable Deposits       $3,500       6%      
to record the receipt of               Sales Tax      
refundable deposits               Accounts Receivable *Rate of Tax
$4140000*6%  
4       Accounts Receivable   $4,388,400           $248,400      
To Sales Revenue       $4,140,000              
To Sales Tax Payable       $248,400       Computation of Accounts Receivable
to record the sales and sales           Sales Revenue+Sales Tax Payable
tax for sep-dec               $4140000+$248400  
$4,388,400      
5       Interest Expense   $480,000                  
To Interest Payable       $480,000       Computation of Accrued Interest
to record the interest               Interest Accrued  
Accrued               Notes payable *Rate of Interest*Number of Months/12
$16000000*12%*3/12  
6       Cash   $12,400,000           $480,000      
To Bonds Payable       $12,400,000              
to record the issue of                      
bonds                      
7   1st March 2019   Interest Expense   $320,000           Computation of interest Expense
Interest Payable   $480,000           Interest Expense  
Notes Payable   $16,000,000           Notes Payable *Rate of Interest *Number of Months/12
To cash       $16,800,000       $16000000*12%*2/12  
to record the repayment               $320,000      
of bank loan along with               Computation of cash to be piad
interest               Interest Expense +Interest Payable+Notes Payable
$320000+$480000+$16000000
Refundable Deposits   $1,750           $16,800,000      
To Cash       $1,750              
To record the payment of                      
Refundable Deposits               Computation of the amount of refundable deposits paid
Refundable Deposits paid
Total Refundable Deposits*1/2
$3500/2      
$1,750      
2       Balance Sheet as at 31st Dec 2018                  
Liabilities   Amount                  
Long Term Liabilities                          
`              
Current Liabilities                          
a   Loan from Second Commercial Bank   $16,000,000                      
c   Security Deposits   $3,500                      
d   Sales Tax Payable   $248,400                      
e   Accrued Interest on loan payable   $480,000                      
f Trade Accounts Payable   $347,000                      
$17,078,900

g storage continers covered $347,000