Chapter 8
Current Liabilities
QUESTIONS
Question 8-1
Liabilities have three essential characteristics. Liabilities are: (1) probable future sacrifices of
Question 8-2
In most cases, current liabilities are payable within one year from the date of the balance sheet
Question 8-3
Distinguishing between current and long-term liabilities is important in helping investors and
Question 8-4
Current liabilities common to the airline industry include payroll liabilities, deferred revenue in
the form of advance ticket sales, and contingent liabilities due to litigation.
Question 8-5
The accrual basis requires expenses to be recorded when incurred. The cash basis requires
Question 8-6
A line of credit is an informal agreement that permits a company to borrow up to a prearranged
answers to Questions (continued)
Question 8-7
If a company borrows from another company rather than from a bank, the note is referred to as
Question 8-8
Four items commonly withheld from employee payroll checks include (1) federal and state
Question 8-9
Four common employer costs in addition to the employee’s salary include (1) federal and state
Question 8-10
Both the employer and the employee pay equal portions of social security taxes. Employers
withhold from employee paychecks a 6.2% Social Security tax up to a maximum base amount and a
Question 8-11
When a company receives cash in advance through the sale of gift cards, it debits cash and
Question 8-12
(a) When Sports Illustrated sells magazine subscriptions, the company will debit cash and credit
answers to Questions (continued)
Question 8-13
The sales tax rate for Hollister is 6.5% calculated as $325 in sales taxes divided by sales of
Question 8-14
Dell will include $10 million as a current note payable and the remaining $120 million as part of
Question 8-15
A contingent liability is an existing, uncertain situation that might result in a loss. Examples
include lawsuits, product warranties, environmental problems, and premium offers.
Question 8-16
The likelihood of the loss occurring can be probable, reasonably possible, or remote. Probable
Question 8-17
A loss contingency is recorded only if a loss is probable and the amount is reasonably estimable.
Question 8-18
If the likelihood of loss is reasonably possible rather than probable, we record no entry but make
Question 8-19
If one amount within a range of potential losses appears more likely than other amounts within
answers to Questions (continued)
Question 8-20
In a pending lawsuit, one side—the defendant—faces a loss contingency, while the other side—
Question 8-21
Liquidity measures the ability of a company to pay current liabilities as they come due. Liquidity
can be evaluated by examining the current ratio or the more specific acid-test ratio.
Question 8-22
Working capital is simply the difference between current assets and current liabilities. The
current ratio is calculated by dividing current assets by current liabilities. The acid-test ratio is
Question 8-23
(a) The purchase of inventory with cash would have no effect on the current ratio as one current
BRIEF EXERCISES
Brief Exercise 8-1
November 1
Debit
Credit
Cash
4,000,000
Notes Payable
4,000,000
Interest Payable
Brief Exercise 8-2
Debit
Credit
4,000,000
Cash
4,000,000
Brief Exercise 8-3
Interest
Face
Annual
Fraction
8-6 Financial Accounting, 5e
Brief Exercise 8-4
April 1
Debit
Credit
Cash
13,000,000
Notes Payable – Commercial Paper
13,000,000
December 31
Notes Payable – Commercial Paper
Cash
Brief Exercise 8-5
Total withheld for:
Social Security
$128,400 × 0.062
=
Brief Exercise 8-6
Debit
Credit
260,000
Deferred Revenue
(to record advance receipt of cash)
Cash
Deferred Revenue
Sales Revenue
Cost of Goods Sold
Inventory
(to complete the sale)
Brief Exercise 8-7
June
$1,200
July
Brief Exercise 8-8
Debit
Credit
Brief Exercise 8-9
Southwest Airlines
Partial Balance Sheet
December 31, 2021
Current Liabilities:
Brief Exercise 8-10
Debit
Credit
930,000
Warranty Liability
930,000
Brief Exercise 8-11
The loss contingency is probable and reasonably estimable, so a loss and a liability for
Brief Exercise 8-12
Electronic Innovators has a contingent liability that is probable, and reasonably
Brief Exercise 8-13
Aviation Systems has a contingent gain that is probable and reasonably estimable,
Brief Exercise 8-14
Northwest Forest Products has a contingent liability that is reasonably possible and
Brief Exercise 8-15
(1) Not recorded (disclosure only) as the loss is reasonably possible, but not probable.
Brief Exercise 8-16
Current Assets
÷
Current Liabilities
=
Current Ratio
($112 + 104 + 192 + 28)
÷
($118 + 45)
=
2.67
÷
Current Liabilities
=
Brief Exercise 8-17
Current
Ratio
Acid-Test
Ratio
1. Provide services to customers on account.
Increase
Increase
3. Purchase office supplies with cash
Decrease
EXERCISES
Exercise 8-1
Reporting Method
C. Current liability
L. Long-term liability
D. Disclosure note only
N. Not reported
Item
__C__ 1. Accounts payable.
__C__ 6. Advance payments from customer.
Exercise 8-2
1. November 1, 2021
Debit
Credit
Cash
60,000
Notes Payable
60,000
2. December 31, 2021
Interest Expense ($60,000 × 7% × 2/12)
3. January 31, 2022
Notes Payable
60,000
Interest Payable ($60,000 × 7% × 2/12)
Interest Expense ($60,000 × 7% × 1/12)
Cash
8-12 Financial Accounting, 5e
Exercise 8-3
1. August 1, 2021
Debit
Credit
2. December 31, 2021
3. January 31, 2022
Notes Payable
21,000,000
Interest Expense ($21 million × 9% × 1/12)
Exercise 8-4
1. August 1, 2021
Debit
Credit
2. December 31, 2021
3. January 31, 2022
Cash
21,945,000
Interest Receivable ($21 × 9% × 5/12)
Interest Revenue ($21 × 9% × 1/12)
Exercise 8-5
1.
$6,000,000
×
0.11
×
6/12
=
$330,000
$6,000,000
×
×
3/12
=
$6,000,000
×
×
4/12
$6,000,000
×
0.07
×
7/12
=
8-14 Financial Accounting, 5e
Exercise 8-6
January 13
No Entry
February 1
Cash
5,000,000
Notes Payable
Notes Payable
5,000,000
Cash
Exercise 8-7
Requirement 1
Total Salary Expense
(100 × 40 hours × $20)
$80,000
Less: Withholdings
Federal Income Taxes
($80,000 × 0.15)
State Income Taxes
($80,000 × 0.05)
FICA Taxes
($80,000 × 0.0765)
Total Withholdings
$57,880
Requirement 2
FICA Taxes
($80,000 × 0.0765)
$ 6,120
Unemployment Taxes
($80,000 × 0.062)
Total Payroll Tax Expense
$11,080
Requirement 3
The company does not make an accounting entry to record the free skiing given to
Exercise 8-8
Requirement 1
January 31
Salaries Expense
3,000,000
Requirement 2
January 31
Requirement 3
January 31
Payroll Tax Expense
415,500
Exercise 8-9
January 31
Salaries Expense
600,000
January 31
Payroll Tax Expense (total)
83,100
8-18 Financial Accounting, 5e
Exercise 8-10
Requirement 1
November 30
Cash
21,000,000
Deferred Revenue
21,000,000
(Advance collection for gift cards)
Requirement 2
Deferred Revenue
Sales Revenue
December 31
Requirement 3
The ending balance in Deferred Revenue is $7,000,000.
Exercise 8-11
Requirement 1
(Sale of gift cards)
October 1, 2021
Requirement 2
December 31, 2021
Requirement 3
March 31, 2022
Deferred Revenue
70,000
Requirement 4
Deferred Revenue
10,000
April 1, 2022
8-20 Financial Accounting, 5e
Exercise 8-12
Requirement 1
The contingent liability is probable and reasonably estimable, so it must be reported.
Requirement 2
Requirement 3
Requirement 4
Loss 4,000,000