In connection with these mortgages, the company is required to maintain minimum net worth.

Learning Goal: I’m working on a accounting question and need an explanation and answer to help me learn.

Kindly check the attached file for the questions.

Note 5: Mortgages on Property, Plant, and Equipment

In connection with these mortgages, the company is required to maintain minimum net worth and comply with other financial covenants, including a restriction limiting loans to officers to less than $2,000,000, At December 31, Year 2, the company is in compliance with these covenants.

The $ 1,794,000 note payable to bank due on April 30, Year 3, is classified as a current liability at December 31, Year 2. The aggregate maturities of mortgages are as follows ($ in thousands):

Year Amount

Consolidated Balance Sheet

($ in thousands) Year 2 Year 1
Current liabilities:
Current installments on mortgages $ 2.747 $ 1,402
Current installments on capital lease obligation 607 -0-
Accounts payable 12,916 15,859
Accrued sales tax 1,574 1.760
Other accrued expenses 1.945 3.118
Deferred income taxes 303 146
Due to officer -0- 599
Income taxes payable 988 -0-
Total current liabilities $21,080 $22,884
Consolidated Statement of Cash Flows
($ in thousands) Year 2 Year 1
Cash flows from financing activities:
Net increase (decrease) in notes payable $ -0- $(3,500)
Principal payments on mortgages (1,298) (1,194)
Principal payments under capital lease obligation (214) -0-
Proceeds from common stock offering -0- -0-
Proceeds from exercise of common stock options 255 145
Repurchase of common stock -0- (3,383)
Net cash provided by (used in) financing activities $(1,257) $(7,9’32)

Required:

  • What was the current portion of Potter’s mortgage payable at the end of
  • How much did Potter pay in cash to reduce its mortgage payable during
  • Explain the difference between your answer to requirement I and your answer to requirement 2.
  • What are the components of the current portion of the mortgage payable as of the end of Year 2?
  • Assume that the next quarterly’ installment on the industrial development bond is due on March 31 Year 3. Prepare a journal entry to record the installment payment and any interest. Assume that the effective interest rate for the bond is 14% per year.
  • The company has a mortgage note payable for $1,794,000 that comes due on April 30, year 3. Suppose that this note is paid by signing of a new 14% note for the amount due. Prepare the April 30 year 3, journal entry to record this refinancing of the old note.
  • Instead of refinancing the note, suppose the company pays the principal along with any remaining interest on April 30, year 3. Prepare a journal entry to record this cash payment.

Year 1?

Year 2?

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