Chapter 9: Current Liabilities, Contingencies, and the True Value of Money
166. The present amount that is equivalent to an amount at a future time.
ANSWER:
e
167. The concept that indicates that people should prefer to receive an immediate amount at the present time over an equal
amount in the future.
ANSWER:
a
168. A series of payments of equal amount.
ANSWER:
f
169. Interest that is earned or paid on the principal amount only.
ANSWER:
b
170. The amount that will be accumulated in the future when a series of payments is invested and accrues interest until the
future time.
ANSWER:
g
171. Interest calculated on the principal plus previous amounts of interest accumulated.
ANSWER:
c
172. The amount needed at the present time to be equivalent to a series of payments and interest in the future.
ANSWER:
h
173. 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.
ANSWER:
d
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
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Comprehension
174. Taxes payable
ANSWER:
a
175. Salaries and wages payable
ANSWER:
a
176. Other accrued liabilities
ANSWER:
a
177. Notes payable
ANSWER:
c
178. Current maturities of long-term debt
ANSWER:
c
179. Accounts payable
ANSWER:
a
Subjective Short Answer
180. Below are several independent items listed for which the outcome of events is unknown at year-end, December 31,
2016.
a. Smethport Company had a barge that leaked oil into the waters surrounding Alaska. The company’s legal counsel
believes that the outcome may be unfavorable but has not been able to estimate the costs of the possible loss.
b. It is alleged by Smethport Company that Argo Company has infringed on its trademark, during a recent advertising
campaign. Smethport is suing Argo and its legal experts believe that the suit will result in an award of $750,000 in
Smethport’s favor.
c. Smethport offers 2-year warranties on the equipment it sells and believes that 5% of its equipment will require warranty
repairs.
d. A $35 coupon, good for one year is offered by Smethport during December. At December 31, approximately 10% of
the coupons have been redeemed and it is estimated that there will be a total redemption rate of 45%.
e. Smethport Company has been sued by the federal government for EPA violations. The company’s legal counsel
believes that there will be an unfavorable verdict and has made an estimate of the probable loss.
Required:
1. Identify which of the items (a) through (e) should be recorded at year-end.
2. Identify which of the items (a) through (e) should not be recorded but should be disclosed in the year-end financial
statements.
ANSWER:
DIFFICULTY:
LEARNING OBJECTIVES:
KEYWORDS:
181. What is meant by the term “current maturities of long-term debt” in the current liabilities section of the balance
sheet?
ANSWER:
The current maturities of long-term debt is a portion of the long-term debt that is due to be
paid in the coming year. If the long-term debt is to be satisfied or retired with cash, it must be
reclassified into the current liabilities section of the balance sheet.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
182. What is the purpose of the current ratio? How does the quick ratio differ from the current ratio?
ANSWER:
The current ratio is calculated by dividing current assets by current liabilities. It is a measure
of the ease with which a company is able to satisfy its current liabilities. The quick ratio is a
more conservative measure of liquidity which excludes inventory and prepayments from the
numerator in the calculation while retaining the same denominator. Accordingly, the quick
ratio is always lower than the current ratio.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Understanding
183. Cole Company had the following accounts and balances on December 31, 2016:
Income Taxes Payable
$ 51,250
Cash
20,000
Notes Payable, 10%, due June 2, 2017
1,000
Accounts Receivable
267,500
Equipment
950,000
Accounts Payable
104,400
Inventory
85,000
Land
600,000
Allowance for Doubtful Accounts
12,000
Discount on Notes Payable
150
Notes Receivable, maturity 2/1/2023
5,000
Current Maturities of Long-Term Debt
6,900
Unearned Revenue
4,320
Interest Payable
1,010
Wages Payable
6,000
Marketable Securities
40,000
Capital Stock
900,000
Required:
1.Compute Cole’s working capital.
2. Compute Cole’s current ratio. What does this ratio indicate about Cole’s condition?
ANSWER:
1.
Working Capital
= Current Assets – Current Liabilities
= $400,500* – $174,730
= $225,770
*Current Assets
Cash
$ 20,000
Accounts receivable
267,500
Less: Allowance for doubtful accounts
(12,000)
Marketable securities
40,000
Inventory
85,000
Total current assets
$400,500
2.
Current Ratio
= Current Assets/Current Liabilities
= $400,500/$174,730
= 2.29 : 1
It seems that Cole has sufficient current assets to meet its short-term obligations (pay its current
liabilities).
DIFFICULTY:
Moderate
LEARNING OBJECT
IVES:
FACC.PONO.13.09-02 – LO: 09-02
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
Chapter 9: Current Liabilities, Contingencies, and the True Value of Money
Hanover, Inc.
Use the selected data from the comparative financial statements for Hanover, Inc. to answer the questions that follow.
Hanover, Inc.
Balance Sheet Accounts
(all accounts have normal balances)
(in millions)
Dec. 30, 2017
Dec. 31, 2016
Inventories
$1,780
$1,649
Total current assets
$9,428
$8,625
Liabilities in order of significance:
Long-term debt
$14,465
$15,001
Other noncurrent liabilities
4,421
3,148
Deferred income taxes
3,504
3,543
Accounts payable
2,556
2,468
Other current liabilities
2,066
1,738
Accrued salaries and wages
1,538
1,082
Short-term borrowings
1,200
1,126
Accrued advertising expense
793
928
Income taxes payable
658
1,142
184. Refer to the account information for Hanover, Inc.
Required:
Compute the total current liabilities for the years 2017 and 2016. Calculate the percentage change in the total current
liabilities.
ANSWER:
The current liabilities have increased from $8,484 in 2016 to $8,811 in 2017. The percentage
change of current liabilities was: ($8,811 – $8,484)/$8,484 = .0385 or approximately 3.9%
increase
2017: $8,811
$2,556 (Accounts Payable) + $2,066 (Other current liabilities) + $1,538 (Accrued salaries
and wages) + $1,200 (Short-term borrowings) + $793 (Accrued advertising expense) + $658
(Income taxes payable) = $8,811
2016: $8,484
$2,468 (Accounts Payable) + $1,738 (Other current liabilities) + $1,082 (Accrued salaries
and wages) + $1,126 (Short-term borrowings) + $928 (Accrued advertising expense) +
$1,142(Income taxes payable) = $8,484
DIFFICULTY:
Moderate
FACC.PONO.13.09-021 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
185. Refer to the account information for Hanover, Inc.
Required:
(1) Calculate percentage changes in accounts payable and income taxes payable. Give a possible explanation for the
changes in these accounts.
(2) By how much did Hanover’s long-term and short-term borrowings change from 2016 to 2017? Give a possible
explanation for the change in debt. What other financial statement would be useful in analyzing the change in borrowings?
Why?
ANSWER:
(1) The change in accounts payable may have resulted from the purchase of additional
inventory and other items on credit. Perhaps, the company is taking more time to pay its
payable in 2017. The percentage change was: ($2,556 – $2,468)/$2,468 = 3.6% increase.
The decrease in income taxes payable perhaps results from a lower net income in 2017 as
compared to 2016. It could also be related to a larger amount of estimated tax payments in
2016 or perhaps the benefit of a refund from the prior year. The percentage change was:
($658 – $1,142)/$1,142 = 42.4% decrease.
(2) The change in long-term debt was a decrease of $536. The change in short-term
borrowings was an increase of $74 for a net decrease of $462. It would appear that Hanover
has paid down its debts or has paid back more than it borrowed in 2017. It is possible that
some money was borrowed short-term to pay back long-term debt. The other financial
statement that would be useful in analyzing these changes is the statement of cash flows. The
financing activities category gives information on the changes in debt.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
FACC.PONO.13.09-021 – LO: 09-02
FACC.PONO.13.09-03 – LO: 09-03
KEYWORDS:
Bloom’s: Analyzing
186. Refer to the account information for Hanover, Inc.
Required:
Calculate the current and quick ratios for 2017 and 2016. Comment on the direction and significance of the change in the
ratios.
ANSWER:
2017 Current ratio: 1.07:1
$9,428/$8,811 = 1.07:1
2016 Current ratio: 1.02:1
$8,625/$8,484 = 1.02:1
The current ratio has improved from 2016 to 2017. The ratio is still lower than many other
companies (2:1 or better); however, Hanover does not appear to be facing a problem with
liquidity.
current ratio which means that inventory is not a very significant current asset for Hanover.
DIFFICULTY:
Moderate
KEYWORDS:
187. What are examples of accounts that might be classified as accrued liabilities in the current liabilities section of the
balance sheet?
ANSWER:
Examples of accounts that might be classified as accrued liabilities in the current liabilities
section of the balance sheet include wages payable, rent payable, utilities payable, advertising
payable, and interest payable.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Applying
188. Each of the following situations involves the use of discounts:
1. How much discount may Mallory Inc. take in each of the following transactions? What was the annualized interest
rate?
a. Mallory purchases inventory costing $970, terms 3/10, n/40.
b. Mallory purchases new office furniture costing $2,100, terms 2/10, n/30.
2. Calculate the discount rate that Mallory received in each of these transactions.
a. Mallory purchased office supplies costing $450 and paid within the discount period with a check for $425.
b. Mallory purchased merchandise for $1,900. It paid within the discount period with a check for $1,870.
ANSWER:
1. a. Purchase Price × Discount Rate = Discount
$970 × 3% = $29.10
Annualized Interest Rate = 3% × (360/30) = 0.36, or 36%
b. Discount = $2,100 × 2% = $42
Annualized Interest Rate = 2% × (360/20) = 0.36, or 36%
2. a. Discount/Purchase Price = Discount Rate
($450 – $425)/$450 = 0.056, or 5.6%
b. ($1,900 – $1,870)/$1,900 = 0.016, or 1.6%
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing
189. Newton Industries had the following transactions during the year:
a. Newton purchased inventory on account from a supplier for $12,000. Assume that Appleton uses a periodic inventory
system.
b. On May 1, land was purchased for $68,500. A 25% down payment was made, and an 18-month, 9% note was signed
for the remainder.
c. Newton returned $545 worth of inventory purchased in (a), which was found broken when the inventory was received.
d. Newton paid the balance due on the purchase of inventory.
e. On June 1, Newton signed a one-year, $14,000 note to Plains State Bank and received $12,750.
f. Newton sold 350 gift certificates for $30 each for cash. Sales of gift certificates are recorded as a liability. At year-end,
40% of the gift certificates had been redeemed.
g. Sales for the year were $100,000, of which 85% were for cash. State sales tax of 7% applied to all sales must be
remitted to the state by January 31.
Required:
1. Record all necessary journal entries relating to these transactions.
2. Assume that Newton’s accounting year ends on December 31. Prepare any necessary adjusting journal entries.
3. What is the total of the current liabilities at the end of the year?
ANSWER:
1. a.
Purchases
12,000
Accounts Payable
12,000
To record purchase of inventory on account.
Land
68,500
Cash (25% × $68,500)
To record purchase of land.
Chapter 9: Current Liabilities, Contingencies, and the True Value of Money
e.
Interest Expense
729.17
Discount on Notes Payable ($1,250 × 7/12)
729.17
To record interest in advance as interest expense.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Discount on
Notes Payable*
729.17
(729.17)
Interest
Expense
729.17
(729.17)
*The Discount on Notes Payable account has decreased. It is shown as an increase
in the equation above because it is a contra account and causes total liabilities to
Increase.
*$1,250 × 7/12 = $729.17
f.
Unearned Sales Revenue
4,200
Sales (40% × $10,500)
4,200
To record gift certificates redeemed.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Unearned
Sales
Revenue
(4,200)*
4,200
Sales
4,200
4,200
*$10,500 × 40% = $4,200
3.
Sales tax payable
$ 7,000.00
Notes payable, due November 1
51,375.00
Notes payable, due June 1
$14,000.00
Less: Discount on notes payable*
(520.83)
13,479.17
Unearned sales revenue**
6,300.00
Interest payable
3,082.50
Total current liabilities
$81,236.67
*$1,250 – $729.17 = $520.83
**$10,500 – $4,200 = $6,300
Moderate
FACC.PONO.13.09-02 – LO: 09-02
Bloom’s: Analyzing
190. On July 1, 2016, Morningside Co. borrowed $33,000 from the bank. Morningside signed a ten-month,
6% promissory note for the entire amount. Morningside uses a calendar year-end.
Required:
1. Prepare the journal entry on July 1, 2016 to record the issuance of the promissory note.
2. Prepare any adjusting entries needed at year-end.
3. Prepare the journal entry on May 1, 2017 to record the payment of principal and interest.
ANSWER:
1.
2016
July
1
Cash
33,000
Notes Payable
33,000
Dec. 31
Interest Expense
Notes Payable
Interest Expense
Interest Payable
Chapter 9: Current Liabilities, Contingencies, and the True Value of Money
191. On September 1, 2016, Ensign Inc. borrowed $21,000 from Emerald City National Bank by issuing a 12-month note.
The bank discounted the note at 7.5%.
Required:
1. Prepare the journal entry needed to record the issuance of the note.
2. Prepare the journal entry needed at December 31, 2016, to accrue interest.
3. Prepare the journal entry to record the payment of the note on September 1, 2017.
4. What effective rate of interest did Ensign pay?
ANSWER:
1.
2016
Sept. 1
Cash
19,425
Discount on Notes Payable
1,575
Dec. 31
Interest Expense
3.
2017
Sept. 1
Interest Expense
1,050
Notes Payable
21,000
Discount on Notes Payable
1,050
Cash
21,000
To record payment of note and amortization of
discount.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Cash
(21,000)
Notes Payable
(21,000)
Discount on
Notes
Payable 1,050*
(1,050)
Interest
Expense
1,050
(1,050)
*$1,575 – $525 = $1,050
4. Effective interest rate = $1,575/$19,425 = 8.11%
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.09-02 – LO: 09-02
KEYWORDS:
Bloom’s: Analyzing