Chapter 13 Current Liabilities
Chapter 13 Current Liabilities and Contingencies
EXERCISES
Exercise 13-8
Requirement 1
Cash 7,500
Liability – customer advance 7,500
Requirement 2
Cash 25,500
Liability – refundable deposits 25,500
Requirement 3
Accounts receivable 856,000
Sales revenue 800,000
Sales taxes payable ([5% + 2%] x $800,000) 56,000
Exercise 13-10
Normally, short-term debt (payable within a year) is classified as current liabilities. However, when such debt is to be refinanced on a long-term basis, it may be included with long-term liabilities. The narrative indicates that Sprint has both (1) the intent and (2) the ability ("existing long-term credit facilities") to refinance on a long-term basis. Thus, Sprint reported the debt as long-term liabilities.
Exercise 13-13
Requirement 1
This is a loss contingency. There may be a future sacrifice of economic benefits (cost of satisfying the warranty) due to an existing circumstance (the warranted awnings have been sold) that depends on an uncertain future event (customer claims).
The liability is probable because product warranties inevitably entail costs. A reasonably accurate estimate of the total liability for a period is possible based on prior experience. So, the contingent liability for the warranty is accrued. The estimated warranty liability is credited and warranty expense is debited in 2011, the period in which the products under warranty are sold.
Requirement 2
2011 Sales
Accounts receivable 5,000,000
Sales 5,000,000
Accrued liability and expense
Warranty expense (3% x $5,000,000) 150,000
Estimated warranty liability 150,000
Actual expenditures
Estimated warranty liability 37,500
Cash, wages payable, parts and supplies, etc. 37,500
Requirement 3
Warranty Liability
150,000 Estimated liability
Actual expenditures 37,500
112,500 Balance
Exercise 13-16
Requirement 1
This is a loss contingency. Some loss contingencies don’t involve liabilities at all. Some contingencies when resolved cause a noncash asset to be impaired, so accruing it means reducing the related asset rather than recording a liability. The most common loss contingency of this type is an uncollectible receivable, as described in this situation.
Requirement 2
Bad debt expense: 3% x $2,400,000 = $72,000
Requirement 3
Bad debt expense (3% x $2,400,000) 72,000
Allowance for uncollectible accounts 72,000
Requirement 4
Allowance for uncollectible accounts:
Beginning of 2011 $75,000
Write off of bad debts* 73,000
Credit balance before accrual 2,000
Year-end accrual (Req. 3) 72,000
End of 2011 $74,000
* Allowance for uncollectible accounts 73,000
Accounts receivable 73,000
Net realizable value:
Accounts receivable $490,000
Less: Allowance for uncollectible accounts (74,000)
Net realizable value $416,000
Exercise 13-21
Item Reporting Method
__C_ 1. Commercial paper. N. Not reported
__D_ 2. Noncommitted line of credit. C. Current liability
__C_ 3. Customer advances. L. Long-term liability
__C_ 4. Estimated warranty cost. D. Disclosure note only
__C_ 5. Accounts payable. A. Asset
__C_ 6. Long-term bonds that will be callable by the creditor in the upcoming year unless an existing violation is not corrected (there is a reasonable possibility the violation will be corrected within the grace period).
__C_ 7. Note due March 3, 2012.
__C_ 8. Interest accrued on note, Dec. 31, 2011.
__L_ 9. Short-term bank loan to be paid with proceeds of sale of common stock.
__D_ 10. A determinable gain that is contingent on a future event that appears extremely likely to occur in three months.
__C_ 11. Unasserted assessment of back taxes that probably will be asserted, in which case there would probably be a loss in six months.
__N_ 12. Unasserted assessment of back taxes with a reasonable possibility of being asserted, in which case there would probably be a loss in 13 months.
__C_ 13. A determinable loss from a past event that is contingent on a future event that appears extremely likely to occur in three months.
__A_ 14. Bond sinking fund.
__C_ 15. Long-term bonds callable by the creditor in the upcoming year that are not expected to be called.
Exercise 13-24
The note describes a loss contingency. Dow anticipates a future sacrifice of economic benefits (cost of remediation and restoration) due to an existing circumstance (environmental violations) that depends on an uncertain future event (requirement to pay claim).
Dow considers the liability probable and the amount is reasonably estimable. As a result, the company accrued the liability:
($ in millions)
Loss provision from environmental claims 312
Liability for settlement of environmental claims 312
In practice this liability would be accrued in multiple entries, increasing when Dow recognized additional liability and decreasing either when Dow paid off parts of the liability or revised downward their estimate of remediation and restoration costs.
PROBLEMS
Problem 13-1
Requirement 1
Blanton Plastics
Cash 14,000,000
Notes payable 14,000,000
L & T Bank
Notes receivable 14,000,000
Cash 14,000,000
Requirement 2
Adjusting entries (December 31, 2011)
Blanton Plastics
Interest expense ($14,000,000 x 12% x 3/12) 420,000
Interest payable 420,000
L & T Bank
Interest receivable 420,000
Interest revenue ($14,000,000 x 12% x 3/12) 420,000
Maturity (January 31, 2012)
Blanton Plastics
Interest expense ($14,000,000 x 12% x 1/12) 140,000
Interest payable (from adjusting entry) 420,000
Notes payable (face amount) 14,000,000
Cash (total) 14,560,000
L & T Bank
Cash (total) 14,560,000
Interest revenue ($14,000,000 x 12% x 1/12) 140,000
Interest receivable (from adjusting entry) 420,000
Notes receivable (face amount) 14,000,000
Problem 13-1 (concluded)
Requirement 3
a.
Issuance of note (October 1, 2011)
Cash (difference) 13,440,000
Discount on notes payable ($14,000,000 x 12% x 4/12) 560,000
Notes payable (face amount) 14,000,000
Adjusting entry (December 31, 2011)
Interest expense ($14,000,000 x 12% x 3/12) 420,000
Discount on notes payable 420,000
Maturity (January 31, 2012)
Interest expense ($14,000,000 x 12% x 1/12) 140,000
Discount on notes payable 140,000
Notes payable (face amount) 14,000,000
Cash 14,000,000
b.
Effective interest rate:
Discount ($14,000,000 x 12% x 4/12) $ 560,000
Cash proceeds ÷ $13,440,000
Interest rate for 4 months 4.1666%
x 12/4
___________
Annual effective rate 12.5%
CASES
Analysis Case 13-16
Requirement 1
Current ratio = Current assets
Current liabilities
= $1,879
$1,473
= 1.28
Industry average = 1.5
The current ratio is one of the most widely used ratios. It is intended as a measure of short-term solvency and is determined by dividing current assets by current liabilities. Comparing assets that either are cash or will be converted to cash in the near term, with those liabilities that must be satisfied in the near term, provides a useful measure of a company’s liquidity. A ratio of 1 to 1 or higher often is considered a rule-of-thumb standard, but like other ratios, acceptability should be evaluated in the context of the industry in which the company operates and other specific circumstances. IGF’s current ratio is slightly less than the industry average which, on the surface, might indicate a liquidity problem. Keep in mind, though, that industry averages are only one indication of adequacy and that the current ratio is but one indication of liquidity.
Case 13-16 (concluded)
Requirement 2
Acid-test ratio = Quick assets
(or quick ratio) Current liabilities
= $48 + 347 + 358
$1,473
= 0.51
Industry average = 0.80
The acid-test or quick ratio attempts to adjust for the implicit assumption of the current ratio that all current assets are equally liquid. This ratio is similar to the current ratio, but is based on a more conservative measure of assets available to pay current liabilities. Specifically, the numerator, quick assets, includes only cash and cash equivalents, short-term investments, and accounts receivable. By eliminating current assets such as inventories and prepaid expenses that are less readily convertible into cash, the acid-test ratio provides a more rigorous indication of a company's short-term solvency than does the current ratio.
Once again, IGF’s ratio is less than that of the industry as a whole. Is this confirmation that liquidity is an issue for IGF? Perhaps; perhaps not. It does, though, raise a red flag that suggests caution when assessing other areas. It’s important to remember that each ratio is but one piece of the puzzle. For example, profitability is probably the best long run indication of liquidity. Also, management may be very efficient in managing current assets so that some current assets – receivables or inventory – are more liquid than they otherwise would be and more readily available to satisfy liabilities.
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related searches
- chapter 13 auto financing dealerships
- chapter 13 bankruptcy class certificate
- chapter 13 car dealerships
- chapter 13 bankruptcy exit course
- chapter 13 second course
- chapter 13 financial management course
- chapter 13 debtor education course
- chapter 13 credit counseling certificate
- chapter 13 online course
- chapter 13 bankruptcy mortgage lenders
- chapter 13 1 rna answer key
- current liabilities vs total liabilities