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CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-33
Comp. Prob. 3 (Continued)
2.
Kornett Company
Bank Reconciliation
December 31, 20Y5
Balance according to bank statement
$ 283,000
Add: Deposit in transit on December 31
29,500
Deduct: Outstanding checks
(68,540)
Adjusted balance
$ 243,960
Balance according to company’s records
$ 245,410
Deduct: Bank service charges
$750
Error in recording check
700
Total deductions
(1,450)
Adjusted balance
$ 243,960
3.
20Y5
Dec.
31
Miscellaneous Expense
750
Accounts Payable
700
Cash
1,450
4.
a.
20Y5
Dec.
31
Bad Debt Expense
18,000
Allowance for Doubtful Accounts
18,000
To record estimated uncollectible
accounts ($16,000 + $2,000).
b.
31
Cost of Goods Sold
3,300
Inventory
3,300
To record inventory shrinkage.
c.
31
Insurance Expense
22,820
Prepaid Insurance
22,820
To record expired insurance.
d.
31
Office Supplies Expense
3,920
Office Supplies
3,920
To record supplies used during the
period.
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
Comp. Prob. 3 (Continued)
e.
20Y5
Dec.
31
Depreciation Expense—Buildings
36,000
Depreciation Expense—Office Equipment
44,000
Depreciation Expense—Store Equipment
5,000
Accum. Depreciation—Buildings
36,000
Accum. Depreciation—Office Equipment
44,000
Accum. Depreciation—Store Equipment
5,000
To record depreciation for the period.
f.
20Y5
Amortization Expense—Patents
6,000
Dec.
31
Patents
6,000
To record patent amortization
($48,000 ÷ 8 years).
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-35
Comp. Prob. 3 (Continued)
5.
Kornett Company
Balance Sheet
December 31, 20Y5
Assets
Current assets:
Petty cash
$ 4,500
Cash
243,960
Notes receivable
100,000
Accounts receivable
$470,000
Allowance for doubtful accounts
(16,000)
Accounts receivable, net
454,000
Inventory
320,000
Interest receivable
1,875
Prepaid insurance
45,640
Office supplies
13,400
Total current assets
$1,183,375
Property, plant, and equipment:
Land
$654,925
Buildings
$900,000
Accumulated depreciation—buildings
(36,000)
Book value—buildings
864,000
Office equipment
$246,000
Accumulated depreciation—
office equipment
(44,000)
Book value—office equipment
202,000
Store equipment
$112,000
Accumulated depreciation—
store equipment
(5,000)
Book value—store equipment
107,000
Mineral rights
$546,000
Accumulated depletion—mineral rights
(30,000)
Book value—mineral rights
516,000
Total property, plant,
and equipment
2,343,925
Intangible assets:
Patents
42,000
Total assets
$3,569,300
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
10-36
Comp. Prob. 3 (Continued)
Liabilities
Current liabilities:
Social security tax payable
$ 25,470
Medicare tax payable
4,710
Employees federal income tax payable
40,000
State unemployment tax payable
270
Federal unemployment tax payable
40
Salaries payable
157,000
Accounts payable
131,600
Interest payable
28,000
Product warranty payable
76,000
Vacation pay payable (current portion)
7,140
Notes payable (current portion)
70,000
Total current liabilities
$ 540,230
Long-term liabilities:
Vacation pay payable
$ 3,360
Unfunded pension liability
50,700
Notes payable
630,000
Total long-term liabilities
684,060
Total liabilities
$ 1,224,290
Stockholders’ Equity
Common stock
$ 500,000
Retained earnings
1,845,010
Total stockholders’ equity
2,345,010
Total liabilities and stockholders’ equity
$ 3,569,300
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
MAKE A DECISION
MAD 10–1
a. Working Capital = Current Assets – Current Liabilities
10-38
MAD 10–1 (Concluded)
Amazon has 56.7% (42.2% + 14.5%) of its current assets consisting of cash and short-term
MAD 10–2
a. Working Capital = Current Assets – Current Liabilities
(in thousands)
b. Current Ratio =
sLiabilitieCurrent
setsCurrent As
$1,139,300 =
sLiabilitieCurrent
Abercrombie:
1.3
$486,000
$93,384 $547,189 =
+
The Gap:
0.7
$2,453,000
$1,783,000 =
d. Working capital is not a good measure for comparing the liquidity of two companies of
different sizes. In this case, The Gap’s current assets are nearly four times larger than
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
MAD 10–3
a. Working Capital = Current Assets – Current Liabilities
b.
sLiabilitieCurrent
setsCurrent As
RatioCurrent =
1.0
$1,909,443
$1,816,778
:3 Year
0.8
$2,217,912
$1,848,598
:2 Year
1.2
$1,935,647
$2,247,047
:1 Year
=
=
=
c.
sLiabilitieCurrent
AssetsQuick
Ratio Quick =
0.5
$1,909,443
$581,381 $296,967
:3 Year
0.4
$2,217,912
$599,073 $346,529
:2 Year
0.6
$1,935,647
$596,940 $97,131 $374,854
:1 Year
=
+
=
+
=
++
d. The quick ratio at the end of Year 1 was 0.6, indicating a tight short-term coverage of
current liabilities with quick assets. This is less of a concern because inventory turns into
10-40
MAD 10–4
a. Kohl’s has over four times the current assets of Neiman Marcus. Thus, using working
sLiabilitieCurrent
Neiman Marcus:
0.1
$840
$62 =
Kohl’s:
0.4
$2,974
$1,074 =
c. Kohl’s quick ratio of 0.4 is four times that of Neiman Marcus’s 0.1. Both companies have a
quick ratio less than 1.0. The small quick ratios can be partially explained by both
MAD 10–5
a. The gift cards represent unearned revenue (a liability). The gift cards have been
b. The credit card loans to the credit card customers do appear to represent mostly
short-term receivables based on the credit card data provided. The average account
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
MAD 10–5 (Concluded)
c.
sLiabilitieCurrent
setsCurrent As
RatioCurrent =
$7,037 =
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
TAKE IT FURTHER
TIF 10–1
1. Cannally and Kennedy is not obligated to pay a bonus to its employees under any
circumstances. The decision to pay a bonus is entirely discretionary. Companies
2. Tonya Latirno, on the other hand, is behaving unethically. Feeling that she is being
cheated, Tonya is attempting to replace the bonus by working overtime that is not
TIF 10–2
1. The so-called “underground economy” hides transactions from IRS scrutiny by
conducting business with cash (not check or credit card, which leaves an audit trail). The
intent in many such transactions is to evade income tax illegally. However, just because a
2. Marvin should respond that he would rather receive a payroll check as a normal employee.
As an employee, receiving cash rather than a payroll check subverts the U.S. tax system.
CHAPTER 10 Liabilities: Current, Installment Notes, and Contingencies
TIF 10–3
A sample solution based on Starbucks’ Form 10-K for the fiscal year ended October 2, 2016,
follows:
1. $4,546.9 million. The company’s current liabilities include accounts payable, accrued
2. The company’s current liabilities have increased from $3,648.1 million to $4,546.9 million.
4. $400 million (balance sheet)
TIF 10–4
Memo
To: U. D. Mach III
From: A+ Student
Re: Financial Reporting of Series 3 Shock Absorber Lawsuit
10-44
TIF 10–4 (Concluded)
An alternative argument could be made that the uncertainty surrounding the connection
between the manufacturing defect and the cracked shock absorber is too uncertain to
TIF 10–5
Sumana’s interpretation of the pension issue is correct. The employee earns the pension
during the working years. The pension is part of the employee’s compensation that is
deferred until retirement. Thus, Felton should record an expense equal to the amount of
