Chapter 09 – Reporting and Interpreting Liabilities
80. 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?
81. Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000
cash on the purchase date, and agreeing to make annual payments for the next ten years; the
first payment is due one year after the purchase date. Rudy’s incremental borrowing rate is
10%. How much will each of the annual payments be?
Chapter 09 – Reporting and Interpreting Liabilities
82. Grant Corporation is looking to purchase a building costing $900,000 by paying $300,000
cash on the purchase date, and agreeing to make payments every three months for the next
five years; the first payment is due three months after the purchase date. Grant’s incremental
borrowing rate is 8%. How much will each of the payments be?
83. Husky Corporation is looking to purchase a building costing $500,000 by agreeing to
make payments every three months for the next five years; the first payment is due three
months after the purchase date. Husky’s incremental borrowing rate is 12%. How much will
each of the payments be?
Chapter 09 – Reporting and Interpreting Liabilities
84. Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make
payments every three months for the next two years; the first payment is due three months
after the purchase date. Huck’s incremental borrowing rate is 8%. How much will each of the
payments be?
85. 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?
Chapter 09 – Reporting and Interpreting Liabilities
86. 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 was $317,520. On January 1,
2010, Straight Industries recorded the purchase with a debit to equipment for $317,520 and a
credit to notes payable for $317,520. On December 31, 2010, Straight recorded an adjusting
entry to account for interest that had accrued on the note. Assuming no adjusting entries have
been made during the year, how much interest expense would have accrued at December 31,
2010?
Chapter 09 – Reporting and Interpreting Liabilities
87. 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?
Chapter 09 – Reporting and Interpreting Liabilities
88. 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?
Chapter 09 – Reporting and Interpreting Liabilities
89. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them
under a note agreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the
note agreement will require $10 million in annual payments starting on December 31, 2010
and continuing for a total of five years (final payment December 31, 2014). Kenworthy will
charge Alden Trucking Company the market interest rate of 10% compounded annually. What
is the note and interest payable liability on December 31, 2010 after the first payment was
made?
Chapter 09 – Reporting and Interpreting Liabilities
90. Alden Trucking Company is replacing part of their fleet of trucks by purchasing them
under a note agreement with Kenworthy on January 1, 2010. Alden financed $37,908,000, the
note agreement will require $10 million in annual payments starting on December 31, 2010
and continuing for a total of five years (final payment December 31, 2014). Kenworthy will
charge Alden Trucking Company the market interest rate of 10% compounded annually. How
much is the 2011 interest expense?
91. A company’s income statement reported net income of $40,000 during 2010. The income
tax return excluded a revenue item of $3,000 (reported on the income statement) because
under the tax laws the $3,000 would not be reported for tax purposes until 2011. Which of the
following statements is correct assuming a 35% tax rate?
Chapter 09 – Reporting and Interpreting Liabilities
92. A company’s income statement reported net income of $80,000 during 2010. 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 2011. Which of the
following statements is incorrect assuming a 35% tax rate?
93. A company’s 2010 income tax return reported a $75,000 tax liability. During 2010, the
deferred income tax liability account increased $9,000. Which of the following statements is
correct?
Chapter 09 – Reporting and Interpreting Liabilities
94. If income tax expense reported on the income statement is $45,000 for 2010, and the tax
return for 2010 (the first year) shows an income tax liability of $42,000, the deferred income
tax on the balance sheet at the end of 2010 will be which of the following? Assume a 40% tax
rate.
95. How much needs to be invested today if your goal is to have $100,000 five years from
today? The return on the investment is expected to be 10% and will be compounded semi-
annually.
Chapter 09 – Reporting and Interpreting Liabilities
96. Which of the following correctly describes the accounting for leases?
97. Which of the following questions is asked with respect to determining the accounting for
leases?
Chapter 09 – Reporting and Interpreting Liabilities
98. Which of the following questions is incorrect with respect to determining the accounting
for leases?
99. How much needs to be invested today if your goal is to be able to withdraw $5,000 for
each of the next ten years beginning one year from today? The return on the investment is
expected to be 12%.
Chapter 09 – Reporting and Interpreting Liabilities
100. How much needs to be invested today if your goal is to be able to withdraw $10,000 for
each of the next nine years beginning one year from today and $50,000 ten years from today?
The return on the investment is expected to be 6%.
Chapter 09 – Reporting and Interpreting Liabilities
101. Halbur Company reported total assets of $150,000, current assets of $60,000, and total
stockholders’ equity of $60,000 and noncurrent liabilities of $65,000.
Requirements (show computations):
1. Compute working capital.
2. Compute the current ratio.
Chapter 09 – Reporting and Interpreting Liabilities
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102. Moore Company has the following partial list of account balances at year-end:
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,)
Chapter 09 – Reporting and Interpreting Liabilities
Chapter 09 – Reporting and Interpreting Liabilities
103. 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.