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Exam 9: Reporting and Interpreting Liabilities

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Question 1

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The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to suppliers.

A) True
B) False

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Question 2

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Straight Industries purchased a large piece of equipment from Curvy Company on January 1,2010.Straight Industries signed a note,agreeing to pay Curvy Company $400,000 for the equipment on December 31,2012.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 1,2010,Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520.On Straight Industries' balance sheet for the year ended December 31,2010,the book value of the liability for notes payable,including accrued interest would be which of the following?

A) $342,922
B) $349,520
C) $345,013
D) $347,213

E) None of the above
F) A) and B)

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Question 3

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Rachel Corporation purchased a building by paying $90,000 cash on the purchase date,agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date; the first payment is due one year after the purchase date.Rachel's incremental borrowing rate is 10%.At what amount would the liability be reported at on the balance sheet as of the purchase date,after the initial $90,000 payment was made?

Which of the following questions is asked with respect to determining the accounting for leases?

Sharp Company borrowed $500,000 on a 6% one-year,interest bearing note dated November 1,2010 with interest payable at maturity.The annual accounting period ends on December 31.Assuming that adjusting entries are only made at December 31,the company's fiscal year-end,prepare journal entries for each of the following dates: A.November 1, 2010. B.December 31, 2010. C.October 31, 2011.

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 accrual of revenue. Which of the above transactions resulted in a decrease in working capital?

The following is a partial list of account balances from the books of Probst Enterprise at the end of 2010: $\begin{array} { l r } \text { Accounts payable } & \$ 20,500 \\\text { Accounts receivable } & 12,300 \\\text { Accrued interest on short-term note } & 1,200 \\\text { Cash } & 6,500 \\\text { Wages payable } & 1,300 \\\text { Income taxes payable } & 1,900 \\\text { Inventory } & 10,000\end{array}$ Based solely upon these balances,what is the quick ratio?

How should a contingent liability that is "reasonably possible" but "cannot reasonably be estimated" be reported within the financial statements?

Straight Industries purchased a large piece of equipment from Curvy Company on January 1,2010.Straight Industries signed a note,agreeing to pay Curvy Company $400,000 for the equipment on December 31,2012.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 1,2010,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 2011 interest expense,assuming that the December 31,2010 adjusting entry was made?

Moore Company has the following partial list of account balances at year-end: $\begin{array} { l r } \text { Accounts payable } & \$ 1,500 \\\text { Accounts receivable } & 4,600 \\\text { Cost of goods sold } & 3,200 \\\text { Cash } & 23,000 \\\text { Taxes payable } & 10,000 \\\text { Land } & 25,000 \\\text { Notes payable (due in } 6 \text { months) } & 1,000 \\\text { Salaries payable } & 900 \\\text { Inventory } & 4,300\end{array}$ Requirements: A.Compute the quick ratio. B.Determine the amount of working capital. C.Assume that cash is used to pay the balance due on accounts payable. 1.Compute the new quick ratio. 2.Compute the new amount of working capital. D.Compute the accounts payable turnover ratio (use year-end amounts,)

A contingent liability is reported on the balance sheet if it is probable and can be estimated.

Phipps Company borrowed $25,000 cash on October 1,2010,and signed a six-month,8% interest-bearing note payable with interest payable at maturity.The amount of interest expense to be reported during 2011 is which of the following?

Which of the following correctly describes the accounting for leases?

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • Lawsuit A: The loss is probable,but the loss can't be reasonably estimated. • Lawsuit B: The loss is reasonably possible,but the loss can't be reasonably estimated • Lawsuit C: The loss is reasonably possible and can be reasonably estimated. Which of the following statements is correct?

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 accrual of revenue. Which of the above transactions resulted in an increase in working capital?

Operating leases are reported on the balance sheet at an amount equal to the present value of the future cash flows.

A company's income statement reported net income of $80,000 during 2010.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 2011. Prepare the journal entry to record the 2010 income tax expense assuming a 40% tax rate.

On January 1,2010,Mission Company agreed to buy some equipment from Anna Company.Mission Company signed a note,agreeing to pay Anna Company $500,000 for the equipment on December 31,2012.The market rate of interest for this note was 10%. Requirements: A.Prepare the journal entry Mission Company would record on January 1, 2010 related to this purchase. B.Prepare the December 31, 2010, adjusting entry to record interest expense related to the note for the first year.Assume that no adjusting entries have been made during the year. C.Prepare the December 31, 2011, adjusting entry to record interest expense related to the note for the second year.Assume that no adjusting entries have been made during the year. D.Prepare the entry Mission Company would record on December 31, 2012, the due date of the note to record interest expense for the third year and payment of the note.Assume that no adjusting entries have been made during the year.

If the quick ratio has been increasing over the past several years,which of the following would cause the ratio to continue to increase?

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years; the first payment is due three months after the purchase date.Rae's incremental borrowing rate is 12%.At what amount would the liability be reported at on the balance sheet as of the purchase date,after the initial $10,000 payment was made?