978-1133939283 Chapter 11 Solution Manual Part 1

DQ1.

Discussion Questions

it is in fact a definitely determinable liability. However, the FASB does require com-

No, the contract should not be considered a liability on the books for the team until

its operating cash needs.

payable, a firm may not be taking advantage of a creditor’s willingness to finance

CHAPTER 11—Solutions

CURRENT LIABILITIES AND

FAIR VALUE ACCOUNTING

11-1

Short Exercises

SE1. Issues in Accounting for Liabilities

11-2

)

1.

Simple interest

2,800

*Rounded

SE6. Simple and Compound Interest

To record replacement of clocks

SE4. Product Warranty Liability

×clocks

$12.50(

SE5. Types of Liabilities

under warranty

11-3

1.

×=

2.

4.

SE7. Present Value Calculations

Five annual payments of $5,000 at 9% (see Table 2 in Appendix B)

$24,000

Single payment of $24,000 at 6% for 12 years (see Table 1 in Appendix B)

Twelve annual payments of $2,000 at 6% (see Table 2 in Appendix B)

0.497 $11,928

11-4

1.

2. Aug. 31 245,100

215,000

19,350

10,750

*Rounded

E1A. Issues in Accounting for Liabilities

Service revenue for the month:

Service Revenue

Federal Excise Tax Payable

Sales Tax Payable

Revenue and related liabilities

Accounts Receivable

E3A. Sales and Excise Taxes

Exercises: Set A

11-5

1.

2.

/=

Federal unemployment tax payable

Total payroll for October equals wages:

Employees’ state income taxes payable

Wages payable

Medical insurance premiums payable

Employees’ federal income taxes payable

Medical insurance premiums payable

E4A. Payroll Expenses

Medicare tax payable

Components of the payroll:

Social security tax payable

Total monthly payroll

219,228.50

12,870.00

5,379.50

0.20

$64,350$12,870

$371,000.00

$ 83,410.38

3,090.96

457.92

51,480.00

23,002.00

15,636.00

$ 94,884.00

$371,000.00

Computations:

Total payroll expenses

State unemployment tax payable

Medicare tax payable

5,379.50

Payroll expenses:

11-6

( – )××=

*/=

1.

E8A. Determining an Advance Payment

$20,000

rounded

E6A. Vacation Pay Liability

Davis should expect to pay $50,311.80.

E7A. Contingencies and Commitments

2. and 3.

Wages of employees on vacation

0.061

0.65 0.061

349

$300,000 $11,102

for 5 periods at 8%

1.

E9A. Present Value Calculations

Single payment of $12,000 at 6% for 12 years (see Table 1 in Appendix B)

2. Twelve annual payments of $1,000 at 6% (see Table 2 in Appendix B)

3. Single payment of $2,500 at 9% for 5 years (see Table 1 in Appendix B)

4. Five annual payments of $2,500 at 9% (see Table 2 in Appendix B)

*

11-7

Factor from

Table 1*

Present Value

of $30,000

E10A. Present Value of a Lump-Sum Contract

E12A. Valuing an Asset for the Purpose of Making a Purchasing Decision

Years

*Table 2 in Appendix B

To find the present value of the purchase transaction:

Rate

At a required rate of return of 14 percent, the cost of the machine is greater than the

11-8

The range between the offer to buy and the offer to sell is from $904,000 to $1,493,800.

E13A. Deferred Payment

Future

Payment

Factor

(3 periods, 4%)

×=

Since the 16 percent annual interest is compounded quarterly, the applicable interest

rate is 4 percent (16 percent / 4 quarters in a year), and the number of periods is 3

(9 months / 3 months in a quarter). The purchase (sale) price is computed as follows

(see Table 1 in Appendix B):

Present

Value

11-9

( + ) / 2

Current Assets ‒ Current Liabilities

2014

Current Assets ‒ Current Liabilities

E15A. Measuring Short-Term Liquidity

2013

*Rounded

Note to Instructor: Solutions for Exercises: Set B are provided separately on the

*Rounded

Copia’s working capital has declined from $55,000 to $50,000 because current liabilities

Payables Turnover = Cost of Goods Sold +/‒ Change in Merchandise Inventory

Average Accounts Payable

=

Working Capital

Payables Turnover

=

$40,000$425,000 +

$65,000 $55,000

Cost of Goods Sold +/‒ Change in Merchandise Inventory

Average Accounts Payable

11-10