On September 5, 2011, Maloney Corporation signed a purchase commitment to purchase inventory for
$180,000 on or before March 31, 2012. The company’s fiscal year-end is December 31. The contract
was exercised on March 4, 2012 and the inventory was purchased for cash at the contract price. On the
purchase date of March 4, the market price of the inventory was $182,000. The market price of the
inventory on December 31, 2011, was $168,000.
a. Prepare the necessary adjusting journal entry (if any is required) on December 31, 2011.
b. Prepare the journal to record the purchase on March 4, 2012. 2
Question 2: Contingencies
Nice Company files a lawsuit against Cheater Corp. for $4,000,000 in December 2010 alleging patent
infringement. Cheater Corp.’s manager thinks it is probable that Cheater Corp. will eventually have to
pay something to settle the suit, and the best estimate of the expected amount ranges from $1,200,000
In your answers below, you may ignore income taxes
a. Show any related journal entries Cheater Corp. will record in 2010.
b. Assume that the managers of Nice Company have information indicating that it is highly probable
that Nice will win the lawsuit and they expect to collect the entire $4,000,000. Show any related
journal entries Nice Company will record in 2010
c. Assume that the lawsuit is settled in 2011 and Cheater Corp. pays Nice Company $2,300,000 in
cash. Calculate the effect this company will have on the 2011 net income for each company.
Question 3: Short-term liabilities
Kendall Products began operations in 2011. The following selected transactions occurred from
September 2011 through March 2012. Kendall’s fiscal year ends on December 31.
a. On September 5, Kendall opened a checking account and negotiated a short-term line of credit of
up to $10,000,000 at 10% interest. The company is not required to pay any commitment fees.
b. On October 1, Kendall borrowed $8,000,000 cash and issued a 5-month promissory note with 8%
interest payable at maturity.
c. Kendall received $3,000 of refundable deposits in December for reusable containers.
d. For the September through December period, sales totaled $5,000,000. The state sales tax rate is
4% and 75% of sales are subject to sales tax.
e. Kendall recorded accrued interest.
f. Kendall paid the promissory note on the March 1 due date.
g. Half of the storage containers are returned in March, with the other half expected to be returned
over the next 6 months.
1. Prepare the journal entries to record the 2011 transactions. 4
Question 3, continued
2. Prepare the liability section of the balance sheet at December 31, 2011 based on the information
3. Prepare the journal entries to record the 2012 transactions.
Question 4: Bonds
The financial statement notes for Green Duck Inc. show the following information about the company’s 6%, 5
year bonds with a face amount of $12,000 due in December 2012. The bonds pay interest semi-annually on
June 30 and December 31.
date carrying value of bonds
a. How much interest was paid in cash for these bonds in 2009?
b. What was the interest expense for these bonds in 2009?
c. When the bonds were issued, what was the market interest rate?
d. What will be the interest expense for these bonds in 2010?
e. How much were the bonds originally issued for? 6
Question 5: Analyzing Rite Aidâ€™s Long-term debt
Following is an excerpt from the debt note provided along with Rite Aidâ€™s financial statements for the year
ended February 26, 2011.
1. Refer to the 10.25% senior secured notes due in October 2019 to answer the following questions:
a. What is the face value (or principal amount) of these notes?
b. Calculate the amount of cash interest Rite Aid paid for these notes for the year ended February 26, 2011.
c. Calculate the amount of discount amortization recorded during the year ended February 26, 2011. Does
this amortization increase or decrease interest expense recorded during the period?
2. Refer to the 8.00% senior secured notes due in August 2020 to answer the following questions.
a. These notes were issued in August 2010. What journal entry did Rite Aid make to record the
issuance of these notes? What effect would the issuance have on the Statement of Cash Flows?
b. Calculate the amount of interest expense related to these notes that would be included on Rite
Aidâ€™s income statement for the year ended February 25, 2012.
3. Assume that on February 27, 2011, Rite Aid repurchased the 9.5% senior notes due in June 2017 for
$797,769. Prepare the journal entry to record this transaction.
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 26, 2011, February 27, 2010 and February 28, 2009
(In thousands, except per share amounts)
10. Indebtedness and Credit Agreement
Following is a summary of indebtedness and lease financing obligations at February 26, 2011 and February 27, 2010:
Senior secured revolving credit facility due September 2012 $ â€” $ 80,000
Senior secured revolving credit facility due August 2015 (or April 2014, see Credit Facility below) 28,000 â€”
Senior secured credit facility term loan due June 2014 1,074,613 1,085,663
Senior secured credit facility term loan due June 2014 ($342,125 and $345,625 face value less unamortized discount of
$19,718 and $25,634) 322,407 319,991
Senior secured credit facility term loan due June 2015 ($650,000 face value less unamortized net discount of $15,036) â€” 634,964
9.75% senior secured notes (first lien) due June 2016 ($410,000 face value less unamortized discount of $5,635 and $6,692) 404,365 403,308
8.00% senior secured notes (first lien) due August 2020 650,000 â€”
10.375% senior secured notes (second lien) due July 2016 ($470,000 face value less unamortized discount of $29,952 and
$35,481) 440,048 434,519
7.5% senior secured notes (second lien) due March 2017 500,000 500,000
10.25% senior secured notes (second lien) due October 2019 ($270,000 face value less unamortized discount of $1,774 and
$1,978) 268,226 268,022
Other secured 5,408 2,316
Guaranteed Unsecured Debt:
8.625% senior notes due March 2015 500,000 500,000
9.375% senior notes due December 2015 ($410,000 face value less unamortized discount of $3,345 and $4,049) 406,655 405,951
9.5% senior notes due June 2017 ($810,000 face value less unamortized discount of $8,130 and $9,431) 801,870 800,569
Unsecured Unguaranteed Debt:
8.125% notes due May 2010 â€” 11,117
9.25% senior notes due June 2013 6,015 6,015
6.875% senior debentures due August 2013 184,773 184,773
8.5% convertible notes due May 2015 64,188 158,000
7.7% notes due February 2027 295,000 295,000
6.875% fixed-rate senior notes due December 2028 128,000 128,000
Lease financing obligations 140,297 152,691
Total debt 6,219,865 6,370,899
Current maturities of long-term debt and lease financing obligations (63,045 ) (51,502)
Long-term debt and lease financing obligations, less current maturities $ 6,156,820 $ 6,319,397
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