Chapter 09 – Reporting and Interpreting Liabilities
Chapter 9
Reporting and Interpreting Liabilities
ANSWERS TO QUESTIONS
1. Liabilities are obligations that result from past transactions that require future
payment of assets or the future performance of services, that are definite in amount
2. External parties have difficulty determining the amount of liabilities of a business in
the absence of a balance sheet. Therefore, about the only sources available to
3. A liability is measured at acquisition at its current cash equivalent amount.
Conceptually, this amount is the present value of all of the future payments of
4. Most debts specify a definite amount that is due at a specified date in the future.
However, there are situations where it is known that an obligation or liability exists
5. Working capital is computed as total current assets minus total current liabilities. It
is the amount of current assets that would remain if all current liabilities were paid,
Chapter 09 – Reporting and Interpreting Liabilities
12. Future value—The future value of a number of dollars is the amount that it will
increase to in the future at i interest rate for n periods. The future value is the
13. $8,000 x .3855 = $3,084.
14. An annuity is a term that refers to equal periodic cash payments or receipts of an
equal amount each period for two or more periods. In contrast to a future value of
Chapter 09 – Reporting and Interpreting Liabilities
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
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* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
Chapter 09 – Reporting and Interpreting Liabilities
MINI-EXERCISES
M9–1.
1st Year $600,000 .11 1/12 = $5,500
2nd Year $600,000 .11 2/12 = $11,000
M9–2.
October 1
Cash (+A) ……………………………………………………………..
290,000
Note payable (+L) ……………………………………………….
290,000
December 31
Interest expense (+E, –SE) ………………………………………
7,250
Interest payable (+L) ……………………………………………
7,250
M9–3.
1. Computed from balance sheet data
2. Balance sheet
3. Notes to the statements
4. Not reported but can be computed from balance sheet and income statement
data.
5. Statement of cash flows
M9–4. Working Capital: $ 120,000 – $ 90,000 = $ 30,000
M9–5.
Working Capital
Remain the same
Decrease
Remain the same
Remain the same
Chapter 09 – Reporting and Interpreting Liabilities
EXERCISES
E9–1.
Req. 1
(a)
Current assets ………………………………………………………
$168,000
Current liabilities:
Accounts payable ……………………………………………….
$56,000
Income taxes payable …………………………………………
14,000
Liability for withholding taxes ………………………………..
3,000
Rent revenue collected in advance ……………………….
7,000
Wages payable ………………………………………………….
7,000
Property taxes payable ………………………………………..
3,000
Note payable, 10% (due in 6 months) ……………………
12,000
Interest payable ………………………………………………….
400
(102,400
)
Working capital ……………………………………………………..
$ 65,600
Chapter 09 – Reporting and Interpreting Liabilities
E9–3.
Req. 1
The additional labor expense was $6,000, which is the total of payroll taxes that must
be paid by the employer. The $10,000 income taxes and the $6,000 FICA taxes paid
by the employees did not add to the labor cost of the employer. The total labor cost to
the company was $86,000 + $6,000 = $92,000. The employees’ take-home pay was
Chapter 09 – Reporting and Interpreting Liabilities
E9–5.
Req.1
Date
Assets
Liabilities
Stockholders’
Equity
November 1
Cash +
Note Payable +
Not Affected
December 31
Not Affected
Interest Payable +
Interest Expense –
April 30
Cash –
Note Payable –
Interest Payable –
Interest Expense –
Req. 2
It is doubtful that long-term borrowing would be appropriate in this situation. After the
Christmas season, Neiman Marcus will collect cash from its credit sales. At this point, it
does not need borrowed funds. It would be costly to pay interest on a loan that was not
needed. It might be possible to borrow for a longer term at a lower interest rate and
invest idle cash to offset the interest charges. Neiman Marcus should explore this
possibility with its bank but in most cases it would be better to borrow on a short-term
basis to meet short-term needs.
E9–6.
Analysts want to evaluate the short-term obligations of a business in order to assess
liquidity or the ability to satisfy a liability that must be paid in the near future. If PepsiCo
had to pay the $3.6 billion immediately, the analysts would want to know the source of
Chapter 09 – Reporting and Interpreting Liabilities
E9–10.
The question of whether a lease will be recorded as a liability depends on the
specific facts and circumstances associated with the lease. In the most simple
terms, a short-term lease probably would not have to be recorded as a liability
E9–11.
Req. 1
Year 2014 Year 2015
Income taxes payable $250,000 $290,000
Increase in deferred tax liability 54,000 58,000
Chapter 09 – Reporting and Interpreting Liabilities
E9–15.
E9–16.
E9–17.
Present value of annuity: $20,000 x 3.2397 = $64,794
E9–18.
Present value of unequal payments:
$20,000 x 0.9091 = $18,182
E9–19.
Present value of cash payments:
$15,000 x 5.9713 = $89,570
Chapter 09 – Reporting and Interpreting Liabilities
E9–23
Req. 1
$58,800 x 1.3605 = $79,997
Req. 2
Savings account (+A) ……………………………………………..
58,800
Cash (-A) …………………………………………………………..
58,800
Req. 3
$79,997 – $58,800 = $21,197 (time value of money or interest)
Req. 4
December 31
2014
2015
Savings account (+A) ………………………..
4,704
5,080
Interest revenue (+R, +SE) ……………..
4,704
5,080
Computations:
2014: $58,800 x 8% = $4,704.
2015: ($58,800 + $4,704) x 8% = $5,080.
Chapter 09 – Reporting and Interpreting Liabilities
PROBLEMS
P9–1.
Req. 1
January 15:
Purchases (+A) ……………………………………………………..
26,500
Cash (-A) …………………………………………………………..
26,500
April 1:
Cash (+A) ……………………………………………………………..
700,000
Note payable, short term (+L) ……………………………….
700,000
Cash (+A) ……………………………………………………………..
15,000
Unearned revenue (+L) ……………………………………….
15,000
Unearned revenue (-L) ……………………………………………
3,750
Service revenue (+R, +SE) …………………………………..
3,750
Electric expense (+E, –SE) ………………………………………
27,860
Electric payable (+L) ……………………………………………
27,860
Wage expense (+E, -SE). ……………………………………….
15,000
Wages payable (+L) ……………………………………………
15,000
Interest expense (+E, -SE). ……………………………………..
31,500
Interest payable (+L) ……………………………………………
31,500
($700,000 x 6% x 9/12 = $31,500).
