Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Valance & Company
Use the selected data from the balance sheet and cash flow statements for Valance & Company to answer the
questions that follow.
Valance & Company
Balance Sheet
(Selected Information)
(in millions)
December 31,
2016
2015
Cash and cash equivalents
$ 76.9
$ 81.6
Current Liabilities:
Loans payable
$ 656.7
$ 634.7
Accounts payable and accrued expenses
1,964.9
1,609.8
Income taxes payable
298.6
319.4
Current portion of long-term debt
14.5
26.5
Total current liabilities
$2,934.7
$2,590.4
Long-term debt
$1,490.4
$1,048.4
Deferred income taxes
298.9
303.3
Other long-term liabilities
1,190.5
1076.1
Valance & Company
Statements of Cash Flow
(Selected Information)
(in millions)
Year ended Dec. 31,
2016
Operating activities
Net income
$ 948.7
Adjustments to reconcile net income to net cash
provided from operating activities:
Depreciation and amortization
664.1
Other
-0-
Changes in operating assets and liabilities:
Accounts receivable
(459.1)
Inventories
(104.8)
Accounts payable and accrued expenses
355.1
Other working capital items
(141.6)
Other noncurrent assets and liabilities
34.2
Net cash provided by operating activities
$1,296.6
Financing activities
Purchase of treasury stock
$ (11.4)
Proceeds from exercise of stock options
149.5
Decrease in long-term debt
(149.5)
Increase in loans payable
577.7
Dividends paid
(450.8)
Net cash provided (used in) financing activities
$1,005.0
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
155. Refer to the data for Valance & Company.
REQUIRED:
(1) What current liabilities appearing on the balance sheet do not appear in the operating activities section of the
statement of cash flows? Why?
(2) What current liabilities appear in the operating activities category of Valance’s statement of cash flows? How
does the change for each year affect the cash flows from operating activities for that year?
156. Refer to the data for Valance & Company.
REQUIRED:
(1) Give a possible explanation for each change in the liabilities listed in the cash flow statement. Do you think
these changes are beneficial for Valance? Why or why not?
(2) If there were a balance in the dividends payable account at the end of the year, would this appear in
the operating activities category of the cash flow statement? Why or why not?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
157. Grain Company sells a product for $760. When the customer buys it, Grain provides a one-year warranty.
Grain sold 1,500 products during 2015. Based on analysis of past warranty records, Grain estimates that
repairs will average 6% of total sales.
REQUIRED:
1. Prepare the journal entry to record the estimated liability.
2. Assume that during 2015, products under warranty must be repaired using repair parts from inventory costing
$49,600. Prepare the journal entry to record the repair of products.
3. Assume that the balance of the Estimated Liabilities for Warranties account as of the beginning of 2015 was
$1,700. Calculate the balance of the account as of the end of 2015.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Note Disclosure of Legal Matters
Use the Note Disclosure Of Legal Matters below to answer the questions that follow.
Note 13 – Legal Matters
On December 14, 2015, the Company was served with a class action complaint filed in federal court in
Burlington, Vermont. The complaint, captioned John Doe vs. The Company was filed by a Company’s
shareholder on behalf of himself and purportedly on behalf of all other Company’s shareholders who purchased
the common stock of the Company during the period from March 25, 2014 through December 19, 2014.
Plaintiff alleges that the Company violated the federal securities laws by making, in 2014, untrue statements of
material facts and omitting to state material facts primarily concerning the Company’s construction and start-up
of its new manufacturing facility. Also named as defendants in the Complaint are certain present and former
officers and directors of the Company. Plaintiff is seeking an unspecified amount of monetary damages.
While this action is in its preliminary stages, management believes, based on an initial review, the allegations
made in the lawsuit are without merit and the Company intends to defend the lawsuit vigorously.
158. Review the Note Disclosure of Legal Matters.
REQUIRED:
(1) What type of liability does this lawsuit typify?
(2) In your opinion, should the Company prepare a journal entry in 2015 to record a liability for this lawsuit?
Why or why not?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
159. Review the Note Disclosure of Legal Matters.
REQUIRED:
(1) If you were to make an entry for the lawsuit against Company, what monetary amount should be recorded?
On what did you base your decision with regard to the amount?
(2) Does the disclosure imply that the Company is involved in only this litigation at this time?
(3) Why did this lawsuit arise? Do you believe it to be a reasonable one or do you think that the plaintiff, has
little grounds for this lawsuit?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
160. Riley Corporation manufactures and sells weedeaters. Riley provides all customers with a three-year warranty
guaranteeing to repair, free of charge, any defects reported during this time period. During the year, it sold
85,000 weedeaters for $225 each. Analysis of past warranty records indicates that 8% of all sales will be
returned for repair within the warranty period. Riley expects to incur expenditures of $15 to repair each
weedeater. The account Estimated Liability for Warranties had a balance of $115,000 on January 1. Riley
incurred $90,000 in actual expenditures during the year.
REQUIRED:
Prepare all journal entries necessary to record the events related to the warranty transactions during the year.
Determine the adjusted ending balance in the Estimated Liability for Warranties account.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
161. Below are three notes payable:
Note Face Value (Principal)
Rate
Term
1
$30,000
4%
6 years
2
30,000
6%
4 years
3 30,000 8% 3 years
REQUIRED:
Part 1. For each of the notes, calculate the simple interest due at the end of the term.
Part 2. Now assume that the interest on the notes is compounded annually. Calculate the amount of interest due
at the end of the term for each note.
Part 3. Finally, assume that the interest on the notes is compounded semiannually. Calculate the amount of
interest due at the end of the term for each note.
Part 4. What conclusion can you draw from a comparison of your results of each of the three scenarios?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
162. Tyson Trucking won a settlement in a lawsuit and was offered four different payment alternatives by the
defendant’s insurance company. The interest rate is 6%. Ignoring tax considerations, which of the following
four alternatives has the highest present value? Support your answer with the appropriate calculations.
I) $150,000 now
II) $45,000 per year for the next 4 years (payment made at the end of the year)
III) $5,000 now and then $20,000 per year for the next 10 years (payment made at the
end of the year)
IV) $5,000 now and then $5,000 per year for the next 10 years (payment made at the end of
the year) plus a lump-sum payment of $200,000 at the end of the eleventh year
163. You just won the lottery. You can take your $2 million in a lump sum today, or you can receive $220,000 per
year over the next 12 years. Assuming a 6% interest rate, which would you prefer, ignoring tax
considerations?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
164. Assume that you want to accumulate $20,000 as a down payment on a home. You believe that you can save
$2,000 per semiannual period, and your bank will pay interest of 6% per year, or 3% per semiannual period.
How long will it take you to accumulate the desired amount?
165. You just purchased an automobile for $19,450 and must decide how to pay for it. Your local bank has granted
you a five-year loan. Annual payments on the loan will be made at the end of each year and the amount of the
loan payments, which include principal and interest, is $5,000 per year. What is the interest rate that is being
charged on the loan?
166. You have received an email from a new accounting client, Jamal Parker, who has just started a new business.
Jamal would like you to explain whether it is really that beneficial for him to take advantage of a 2/10, net 30
discount offered by one of his suppliers, given his limited cash flow. In a memo, explain to him why this is or is
not a sound financial move for his new company. Most firms attempt to pay their accounts payable within the
discount period to take advantage of the discount. Why is that normally a sound financial move?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
167. You friend, Edwin Slotkin, has started a new business, but has recently encountered a slight cash flow
problem. He obtains a $1,000 loan at 10% per year from a local bank, but would like to ask you about the
terms. The bank has deducted the interest in advance and he wants to know if 10% is his effective interest rate.
How would you respond in an email?
168. A firm’s year ends on December 31. Its tax is computed and submitted to the U.S. Treasury on March 15 of the
following year. When should the taxes be reported as a liability?
169. According to the text, almost all current liabilities appear in the Operating Activities category of the
statement of cash flows, but there are exceptions. Explain the exceptions and give an example.
170. Dallas Company uses the indirect method of preparing the statement of cash flows and has the following
current liabilities at the beginning of the period: Accounts Payable, $35,000; Taxes Payable, $15,000. At the
end of the period, the balances of the account are as follows: Accounts Payable, $25,000; Taxes Payable,
$20,000. What amounts will appear in the cash flow statement? In what category of the statement will they
appear?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
171. There are very important differences between U.S. and international standards regarding contingencies. Even
the terms used to refer to situations with unknown outcomes differ. Explain these differences.
172. What is the difference between simple interest and compound interest? Is the amount of interest higher or
lower when the interest is simple rather than compound?
173. The present value and future value concepts are applied to measure the amount of several accounts
common in accounting. What are some accounts that are valued in this manner?
174. What is the meaning of the word annuity? Can the present value of an annuity be calculated as a series of
single amounts? If so, how?
175. Assume that you know the total dollar amount of a loan and the amount of the monthly payments. How can
you determine the interest rate as a percentage of the loan?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
Identify the classifications of the following accounts as either current or long-term liabilities for the December
31, 2014 balance sheet.
a. Current liability
b. Long-term liability
176. An amount of money owed to a supplier based on the terms 2/20,
n/40, for which no note was executed.
177. An amount of money owed to a creditor on a note due August 15, 2022.
178. Estimated warranty payable by June 30, 2015.
179. An amount of money owed in 2015 to a creditor as an annual installment payment on a ten-year note, due
June 30, 2020.
180. An amount of money owed for years 2016 to 2020 to a creditor as annual installment payments on a ten-year
note, due June 30, 2020.
181. An amount of money owed to the federal government based on the company’s annual income.
Match each of the following terms pertaining to liabilities to their definitions.
a. Current liability
b. Accounts payable
c. Notes payable
d. Discount on notes payable
e. Current maturities of long-term liabilities
f. Accrued liabilities
g. Contingent liability
h. Estimated liability
182. The portion of a long-term liability that will be paid within one year of the balance sheet date.
183. Accounts that will be satisfied within one year or the next operating cycle.
184. A liability that has been incurred but has not been paid as of the balance sheet date.
185. Amounts owed for the purchase of inventory, goods, or services acquired in the normal course of business.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
186. A liability that involves an existing condition for which the outcome is not known with certainty and depends
on some future event.
187. Amounts owed that are represented by a formal contractual agreement. These amounts usually require the
payment of interest.
188. A contra-liability account that represents interest deducted from a loan or note in advance.
From the following list, identify whether the change in the account balance during the year would be reported
as an operating (O), an investing (I), or a financing (F) activity or not separately reported on the statement of
cash flows (N). Assume that the indirect method is used to determine the cash flows from operating activities.
a. O – Operating
b. I – Investing
c. F – Financing
d. N – Not separately reported on the Statement of Cash Flows
189. Taxes payable
190. Salaries and wages payable
191. Other accrued liabilities
192. Notes payable
193. Current maturities of long-term debt
194. Accounts payable
Match each of the following terms related to interest and time value of money calculations to their appropriate
definition.
a. Time value of money
b. Simple interest
c. Compound interest
d. Future value of a single amount
e. Present value of a single amount
f. Annuity
g. Future value of an annuity
h. Present value of an annuity
195. The present amount that is equivalent to an amount at a future time.
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
196. The concept that indicates that people should prefer to receive an immediate amount at the present time over
an equal amount in the future.
197. A series of payments of equal amount.
198. Interest that is earned or paid on the principal amount only.
199. The amount that will be accumulated in the future when a series of payments is invested and accrues interest
until the future time.
200. Interest calculated on the principal plus previous amounts of interest accumulated.
201. The amount needed at the present time to be equivalent to a series of payments and interest in the future.
202. The amount that will be accumulated in the future when one amount is invested at the present time and
accrues interest until the future time.
203. Ashley Wilson’s grandparents want to give her some money when she graduates from high school. They have
offered Ashley the following three choices:
a. Receive $25,000 immediately. Assume that interest is compounded annually.
b. Receive $3,200 at the end of each six months for four years. Ashley will receive the first check in six months.
c. Receive $7,000 at the end of each year for four years. Assume that interest is compounded annually.
REQUIRED:
Ashley wants to have money for a new car when she graduates from college in four years. Assuming an
interest rate of 8%, what option should she choose to have the most money in four years? (Round your
answers to the nearest dollar.)
204. Apply the time value of money in the following independent situations:
1. Jason Marx deposited $29,500 in the bank on January 1, 1998, at an interest rate of 12% compounded
annually. How much has accumulated in the account by January1, 2015?
2. June Cunningham deposited $54,200 in the bank on January 1, 2005. On January 2, 2015, this deposit has
accumulated to $106,611. Interest is compounded annually on the account. What rate of interest did June earn
on the deposit?
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
205. Apply the time value of money in the following independent situations:
1. Margaret Carlson made a deposit in the bank on January 1, 2008. The bank pays interest at the rate of
8% compounded annually. On January 1, 2015, the deposit has accumulated to $40,000. How much money
did Margaret originally deposit on January 1, 2008?
2. Claude Cooper deposited $15,600 in the bank on January 1 a few years ago. The bank pays an interest rate
of 10% compounded annually, and the deposit is now worth $40,420. For how many years has the deposit
been invested?
206. All of the following statements about current liabilities are true except:
a. Current liabilities are obligations which will be satisfied within one year.
b. Current liabilities are normally recorded at face value.
c. The current liability section never contains any portion of long-term liabilities.
d. Current liabilities finance the working capital of the company.
207. If your bank gives you a $2,000 loan at 8% per year, but deducts the interest in advance, is 8% the “real” rate of
interest that you will pay?
a. Yes.
b. No. The interest rate is actually lower than 8 percent.
c. No. The interest rate is actually higher than 8 percent.
d. There is not enough information to answer this question accurately.
208. What is the correct classification of the account: Discount on Notes Payable?
a. an asset
b. an expense
c. a revenue
d. a contra liability
Chapter 9: Current Liabilities, Contingencies, and the Time Value of Money
209. What type of interest is calculated on the balance of the principal only?
a. equivalent interest
b. compounded interest
c. future interest
d. simple interest
From the following list, identify whether the change in the account balance during the year would be reported
as operating (O) cash flow, investing (I) cash flow, financing (F) cash flow or not separately (N) reported on the
statement of cash flows. Assume that the indirect method is used to prepare the operating activities section. Use
the following response choices a-d.
a. operating (O) cash flow
b. investing (I) cash flow
c. financing (F) cash flow
d. not separately (N) reported on the statement of cash flows
210. Taxes payable
211. Salaries and wages payable
212. Other accrued liabilities
213. Notes payable
214. Current maturities of long-term debt
215. Accounts payable