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Exam 9: Reporting and Interpreting Liabilities

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Question 41

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Which of the following statements is correct?

A) Current liabilities are initially recorded at the amount of their principal plus interest.
B) Current liabilities are those liabilities due within one year.
C) Liquidity refers to the ability to pay all debts within one year.
D) Current liabilities affect working capital and the cash flows from operating activities.

E) B) and C)
F) A) and D)

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Question 42

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The accrual of interest results in the following:

A) Increase in assets and liabilities.
B) Increase in assets and stockholders' equity.
C) Increase in liabilities and decrease in stockholders' equity.
D) Increase in liabilities and increase in stockholders' equity.

E) A) and B)
F) All of the above

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Question 43

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You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine?

A company's income statement reported net income of $80,000 during 2014. The income tax return excluded a revenue item of $10,000 (reported on the income statement) because under the tax laws the $10,000 would not be reported for tax purposes until 2015. Required: Prepare the journal entry to record the 2014 income tax expense assuming a 40% tax rate.

Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2014. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2014 and continuing for a total of four more years (final payment December 31, 2018) . Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. After the first payment was made, the note and interest payable liability on December 31, 2014 is closest to:

Moore Company has the following partial list of account balances at year-end December 31, 2014: $\begin{array} { l r } \text { Accounts payable } & \$ 1,800 \\\text { Accounts receivable } & 4,600 \\\text { Cost of goods sold } & 15,000 \\\text { Cash } & 23,000 \\\text { Taxes payable } & 10,000 \\\text { Land } & 25,000 \\\text { Notes payable (due in } 6 \text { months) } & 1,000 \\\text { Salaries payable } & 900 \\\text { Inventory } & 4,300\end{array}$ Additional information: The accounts payable balance at the end of the prior year was $3,000. Required: (All answers are for December 31, 2014.) A. Determine the following items: 1. Current assets 2. Current liabilities 3. Working capital 4. Accounts payable turnover ratio 5. Average age of accounts payable B. Assume that cash is used at December 31, 2014 to pay the entire balance of accounts payable. Determine the revised amounts from part (A) above for the following items: 1. Current assets 2. Current liabilities 3. Working capital 4. Accounts payable turnover ratio 5. Average age of accounts payable C. Comment on the effect of paying accounts payable at year-end with regard to working capital and accounts payable management.

The accrual of interest results in an increase liabilities and a decrease in cash.

Purchasing inventory on account increases the accounts payable turnover ratio.

In order to calculate the cost of a long-term asset that is financed with long-term debt, present values concepts would be used.

Which of the following statements incorrectly describes the accounts payable turnover ratio?

A company's income statement reported net income of $80,000 during 2014. The income tax return excluded a revenue item of $6,000 (reported on the income statement) because under the tax laws the $6,000 would not be reported for tax purposes until 2015. Which of the following statements is incorrect assuming a 35% tax rate?

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. On the balance sheet as of the purchase date, after the initial $10,000 payment was made, the liability reported is closest to:

The following data were provided by the detailed payroll records of Mountain Corporation for the last week of March 2015, which will not be paid until April 5, 2015: $\begin{array}{lr}\text { Compensation (wages) } & \$ 36,000 \\\text { Income taxes withheld } & 7,350 \\\text { Health insurance withheld } & 200\end{array}$ FICA taxes at a 7.65% rate (no employee had reached the maximum). Required: A. Prepare the March 31, 2015 journal entry to record the payroll and the related employee deductions. B. Prepare the March 31, 2015 journal entry to record the employer's FICA payroll tax expense. C. Calculate the total payroll-related liabilities at March 31, 2015 using the results of requirements (A) and (B) above.

Which of the following statements about contingent liabilities is incorrect?

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable. • Collected cash for services to be provided within the next six months. • The reclassification of short-term debt to long-term debt. Which of the above transactions resulted in an increase in working capital?

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $5,000 payment was made, is closest to:

Answer the following four questions. A. What is a contingent liability? B. When must a contingent liability be recorded through a journal entry? C. When should a contingent liability be disclosed in the footnotes to the financial statements? D. When is disclosure of a contingent liability not required?

Thomas Company decided to borrow $30,000 on March 1^st, 2014. Thomas signed a 2-year 6% interest-bearing note. What is the adjustment amount to accrue interest on December 31, 2015?

Fold and Hold Corporation purchased a machine, which had a current cash equivalent cost of $38,971 on January 1, 2014. Fold and Hold paid cash of $10,000 and signed an interest-bearing note for the balance, payable in six equal annual installments on each December 31 beginning with December 31, 2014. The note specified a 10% interest rate on the unpaid balance. Requirements: A. Prepare the journal entry to record the purchase on January 1, 2014 (round to the nearest dollar). B. Prepare the entry to record the first installment payment on December 31, 2014 (round to the nearest dollar). Assume that no adjusting entries have been made during the year.

Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2014, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. How much is the 2015 interest expense, assuming that the December 31, 2014 adjusting entry was made?