For Each Independent Situation

question 45

Essay

For each independent situation:
1. Moosehead Pool and Skeet Com.'s debt to equity ratio is 1.6: 1 based on its draft financial statements for the year ended December 31, 2020. This leverage ratio exceeds the 1.5:1 maximum stipulated in Moosehead's loan agreement pertaining to a $5,000,000 loan maturing on March 15, 2023. The loan agreement stipulates that the loan becomes payable on demand upon breach of any of the loan covenants. Moosehead's creditors agreed on December 15, 2020 to waive their right to demand payment until December 31, 2021 for reason only that the firm's leverage ratio exceeds the stipulated maximum.
2. Guelph Piano Storage Inc. issued a $30,000, 30-day, non-interest bearing note to Roland's Crating for storage bins. The market rate of interest for similar transactions is 2.5%.
3. On November 30, 2019, Port Meadow Fertilizer Ltd. entered into a non-cancellable agreement to buy 10 tonnes of phosphorus for $1,600 per tonne for delivery on February 28, 2020. Phosphorus is a key component of the custom fertilizer that Port Meadow produces. The market price of phosphorus is extremely volatile, as evident by the $1,175 per tonne that it could be acquired for on December 31, 2019. Notwithstanding the premium price paid for the phosphorus, the company expects that fertilizer sales will remain profitable. Port Meadow's year-end is December 31, 2019.
Required:
For each of the situations described above, prepare the required journal entry for the underlined entity. If a journal entry is not required, explain why.

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Definitions:

Balance Sheet

A financial statement that shows a company's financial position at a specific point in time, including assets, liabilities, and shareholder equity.

Net Income

The total profit of a company after all expenses, including taxes and operating costs, have been deducted from revenues.

Weighted Average

A calculation that takes into account the varying weights of items in a dataset, often used in accounting to compute inventory values.

Common Shares

Equity investments representing ownership in a corporation, granting holders voting rights and a share in the company's profitability.