Chapter 9
Reporting and Interpreting Liabilities
ANSWERS TO QUESTIONS
1. Liabilities are probable future sacrifices of economic benefits that arise from past
3. Companies typically list obligations to pay suppliers in the near future on their
balance sheets as accounts payable.
4. The accounts payable turnover ratio measures how quickly management pays
5. An accrued liability is an expense that was incurred before the end of the current
6. A note payable is a written promise to pay a stated sum at one or more specified
7. $4,000 x 12% x 9/12 = $360.
8. Deferred revenues (also called unearned revenues) reflect cash a company has
9. A contingent liability is a potential liability that has arisen as the result of a past
event. Examples of contingent liabilities are lawsuits and warranties. A contingent
liability is only reported on the balance sheet if (1) it is probable that the company
10. Working capital is a measure of a company’s ability to cover its current obligations.
It is defined as the dollar difference between current assets and current liabilities.
11. A finance lease resembles the financing and outright purchase of an asset. As a
12. The time value of money is the principle that a given amount of money deposited in
14. An annuity is a series of periodic cash receipts or payments that are equal in
amount each interest period.
15.
Present Value Factors
Concept
PV of $1
PV of annuity of $1
i = 5%
i = 10%
ANSWERS TO MULTIPLE CHOICE
Financial Accounting, 10/e 9-3
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
No.
Time
No.
Time
No.
Time
No.
Time
1
5
1
30
1
35
1
45
1
30
2
5
2
20
2
45
2
20
2
30
3
10
3
20
3
20
3
25
3
30
4
10
4
30
4
25
4
20
4
20
5
5
5
20
5
20
5
25
5
45
6
5
6
20
6
25
6
40
6
*
7
5
7
20
7
20
7
30
8
5
8
20
8
15
8
30
9
10
9
20
9
25
10
10
10
15
10
25
11
10
11
10
11
40
12
10
12
10
12
30
13
20
13
35
14
15
14
30
15
15
16
20
17
20
* 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
MINI-EXERCISES
M9-1.
A current liability is a short-term liability that will be paid in cash (or other current assets)
M9-2.
The accounts payable turnover ratio is:
M9–3.
M9–4.
October 1
M9–5.
Last year: Buzz does not have to record or disclose the liability because
M9–6. Current assets = $120,000 ($360,000 – $240,000)
M9–7.
Effect on Working Capital
a. Remain the same
b. Decrease
c. Remain the same
d. Remain the same
M9-8.
StarGaze will not enter a journal entry upon signing the short-term lease.
M9–9.
M9–10.
M9–11.
$129,000
x
=
x
=
Total
$380,438
M9–12.
The journal entry to record the purchase of the equipment and the signing of the
note is:
Amount
Present Value Factor
Present value
$118,000
x
N/A
=
$118,000
Financial Accounting, 10/e 9-7
EXERCISES
E9–1.
Req. 1
(a)
Current assets ($530,000 – $362,000) ………………………
$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
Property taxes payable ………………………………………..
3,000
Note payable, 10% (due in 6 months) ……………………
12,000
Interest payable ………………………………………………….
)
Working capital (current assets – current liabilities) …….
Req. 2
No. If the contingent liabilities are reported in the notes, then they would not affect
working capital.
E9–2.
Req. 1
March 31
Compensation expense (+E, –SE) ……………………………………
200,000
Liability for income taxes withheld-employees (+L) …………
40,000
Liability for insurance premiums withheld-employees (+L) .
FICA taxes payable-employees (+L) …………………………….
15,000
Payroll for March including employee deductions.
E9–2. (continued)
Req. 2
March 31
Compensation expense (+E, –SE) ……………………………………
15,000
FICA taxes payable-employer (+L) ……………………………….
15,000
Employer payroll taxes on March payroll.
Req. 3
Liability for income taxes withheld-employees (-L) ……………..
40,000
FICA taxes payable-employees (-L) …………………………………
15,000
FICA taxes payable-employer (-L) …………………………………..
15,000
71,000
Remittance of payroll taxes and deductions for March payroll.
E9–3.
Req. 1
Req. 2
Balance sheet liabilities:
Liability for income taxes withheld ………………………………………………….
FICA taxes payable ($6,000 + $6,000) ……………………………………………
Total ………………………………………………………………………………………
Req. 3
The junior accountant is only seeing a piece of the total compensation puzzle. Since
Financial Accounting, 10/e 9-9
E9–4.
Req. 1
November 1
Cash (+A) ……………………………………………………………..
4,800,000
Note payable (+L) ……………………………………………….
4,800,000
Borrowed on 6-month, 8%, note payable.
Req. 2
December 31 (end of the accounting period):
Interest expense (+E, –SE) ………………………………………
Interest payable (+L) ……………………………………………
*$4,800,000 x .08 x 2/12 = $64,000
Req. 3
April 30 (maturity date):
Note payable (-L) …………………………………………………..
4,800,000
Interest payable (per above) (-L) ………………………………
Interest expense (+E, –SE) ………………………………………
*
Cash (-A) …………………………………………………………..
*$4,800,000 x .08 x 4/12 = $128,000
Req. 4
It is doubtful that long-term borrowing would be appropriate in this situation. After the
Christmas season, Nordstrom will collect cash from its credit sales. At this point, it does
E9–5.
Date
Assets
Liabilities
Stockholders’
Equity
(a)
November 1
Cash +
Note Payable +
No Effect
(b)
December 31
No Effect
Interest Payable +
Interest Expense –
E9–6.
Req. 1
Date
Assets
Liabilities
Stockholders’
Equity
(a)
January 10
Inventory +
Accounts Payable +
No Effect
(b)
March 1
Cash +
Note Payable +
No Effect
Req. 2
Req. 3
Transaction (a) has no impact on cash flows because there is neither an inflow nor
Financial Accounting, 10/e 9-11
E9–7.
Req. 1
To compute the average number of days that a company’s accounts payable are
outstanding, first compute the accounts payable turnover ratio:
Accounts payable turnover ratio = Cost of goods sold / Average accounts payable
Req. 2
On average, Skullcandy’s competitor takes one month to pay suppliers. Skullcandy
E9-8.
Req. 1
At signing:
Req. 2
At maturity:
E9-9.
The lawsuits are contingent liabilities. Accounting guidance on contingent liabilities
suggest James should do the following for each lawsuit:
a. Disclose this lawsuit in its footnotes as management judged the possibility of
James losing the lawsuit as “reasonably possible.”
E9–10.
Total assets = $1,200,000
E9–11.
The note does not state whether the leases are finance leases or operating leases,
E9–12.
If a company intends to renew a short-term lease, and the renewal extends the
E9–13.
Req. 1
$60,000 x 0.75131
=
$45,079
=
$90,000 x 0.51316
=
$46,184
$40,000 x 6.14457
=
E9–14.
Present value of unequal payments (amounts rounded):
E9–15.
Present value of investment (amounts rounded):
E9–16.
Present value of cash payments:
E9–17.
Present value of option (a):
E9–18.
Present value of annuity: $20,000 x 4.86842 = $97,368
E9–19.
Financial Accounting, 10/e 9-15
E9–20.
E9–21.
Req. 1
Year 1 Year 2
Req. 2.
Tax expense is based on income reported on the income statement while the cash paid
E9–22.
Req. 1
Income tax payable:
Req. 2
Companies keep different records because there are separate rules governing
E9–23.
Req. 1
Req. 2
Savings account (+A) ……………………………………………..
58,800
Cash (-A) …………………………………………………………..
58,800
Req. 3
Req. 4
December 31
Year 1
Year 2
Savings account (+A) ………………………..
4,704
5,080
Interest revenue (+R, +SE) ……………..
4,704
5,080
Financial Accounting, 10/e 9-17
E9–24.
Req. 1
End of Year 1
Savings account (+A) ……………………………………………..
2,000
Cash (-A) …………………………………………………………..
2,000
Req. 2
Req. 3
Req. 4
Req. 5
End of Year
Year 2
Year 3
PROBLEMS
P9–1.
Req. 1
January 15:
Inventory (+A) ……………………………………………………….
26,500
Cash (-A) …………………………………………………………..
26,500
Note payable, short term (+L) ……………………………….
Cash (+A) ……………………………………………………………..
15,000
Deferred revenue (+L) …………………………………………
15,000
July 15:
Deferred revenue (-L) ……………………………………………..
3,750
Service revenue (+R, +SE) …………………………………..
3,750
December 12:
Utilities expense (+E, –SE) ………………………………………
27,860
Utilities 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
Financial Accounting, 10/e 9-19
P9–2.
Req. 1
January 8:
Inventory (+A) ……………………………………………………….
14,860
Accounts payable (+L) …………………………………………
14,860
Accounts payable (-L) …………………………………………….
14,860
Cash (-A) …………………………………………………………..
14,860
Cash (+A) ……………………………………………………………..
Note payable, short term (+L) ……………………………….
June 3:
Inventory (+A) ……………………………………………………….
17,420
Accounts payable (+L) …………………………………………
17,420
July 5:
Accounts payable (-L) …………………………………………….
17,420
Cash (-A) …………………………………………………………..
17,420
Cash (+A) ……………………………………………………………..
Cash (+A) ……………………………………………………………..
Deposit on trailer (+L) ………………………………………….
Wage expense (+E, –SE). ……………………………………….
Wages payable (+L) ……………………………………………
P9–2. (continued)