Chapter 9: Reporting and Interpreting Liabilities



Chapter 9: Reporting and Interpreting Liabilities

Liabilities Defined and Classified

1. What are liabilities?

2. How are liabilities first recorded?

3. What are the current ratio and working capital a measure of?

Accounts Payable Turnover

1. What is the equation for the accounts payable turnover ratio?

2. What does the accounts payable turnover ratio measure?

3. What does a high accounts payable turnover ratio measure?

Current Liabilities

1. What are current liabilities?

Accrued Liabilities

2. What are accrued liabilities?

3. How is the amount of income tax withheld from employee’s wages recorded by the employer?

4. Who must pay FICA taxes?

5. What does compensation expense include?

6. When must the cost of vacation pay be recorded?

7. Ashanti Goldfield Company (AGC) had the following account balances related to the payroll at the end of the period:

FICA taxes payable (employee’s share) $10,000

Liability for income taxes withheld 20,000

Salary and wage expense 100,000

Without considering any employer payroll taxes, AGC would record salaries payable for the pay period in the amount of?

8. Kuffuor Company has completed the payroll for December 2001, reflecting the following data:

Salaries and wages earned $100,000

Employee income taxes withheld 10,000

Union dues withheld 1,000

FICA payroll taxes 6,000

Federal unemployment taxes 1,000

State unemployment taxes 1,000

The FICA payroll taxes are assessed on both the employer and the employee (i.e. $6,000 each).

a. What was the amount of the employee’s take home pay?

b. What is the total labor cost for the company?

Deferred Revenues and Service Obligations

9. What are deferred revenues?

10. When is the expense related to warranties recorded?

11. On 7/1/2001, Rawlings Company sold 500 toilets at $200 each. These toilets are sold with a 1-year warranty. Past experience indicates that warranty costs average $20 per toilet sold. By the year ended 12/31/2002, 200 toilets have been serviced at a cost of $4.000.

a. The income statement for the year ended 12/31/2001 should report warranty expense of?

b. The balance sheet at 12/31/2001 should report warranty liability of?

Notes Payable

12. What is the time value of money?

13. How is interest computed?

14. Kramer Company borrowed $25,000 cash on November 1, 2002, and signed a six-month, 12% interest-bearing note payable with interest payable at maturity. The company paid the note and the interest at the due date. The amount of accrued interest payable that should be shown on the 12/31/2003 balance sheet is?

15. When is interest expense incurred for a note payable recorded?

Deferred Taxes

1. What are deferred taxes?

2. What are temporary differences?

3. If income tax expense reported on the income statement is $45,000 for 2002, and the tax return for 2002 (the first year) shows an income tax liability of $42,000 the deferred income tax amount on the balance sheet at the end of 2002 will be?

4. Kofi Corporation reported the following summarized pretax data at the end of the year:

Sales $100,000

Expenses 60,000

Pretax income 40,000

Thirty percent of Kofi’s sales were on credit and 10% of expenses have not been paid. Assume that the IRS assesses taxes based on cash collected and/or paid. Kofi’s tax rate is 40%.

a. What is tax expense for the year

b. What is taxes payable for the year?

Accrued Retirement Benefits

1. What is a defined contribution plan?

2. What is a defined benefit plan?

Contingent Liabilities

1. What is a contingent liability?

2. What situations cause a contingent liability to be recorded, disclosed in the notes, or not disclosed in the notes?

3. When are contingent gains recognized?

Present and Future Value Concepts

1. What is present value?

2. What is future value?

Future and Present Values of a Single Amount

1. What is the equation to determine the future value of a single amount?

2. What is the equation to determine the present value of a single amount?

3. What is the present value of $100 received in 10 years with an 8% applicable interest rate?

4.

4. Jim wants to retire in 20 years and estimates that he will need $1,000,000 to retire at a comfortable level. He has been working hard and saving hard up to this point and has $150,000 built up from investing. If Jim figures he can get an annual interest rate of 8% on his investment and plans to invest an equal amount at the beginning of each of the next 20 years, what does that amount need to be for him to reach his goal?

5. On 1/1/2002, Hallmark Inc. acquired a piece of equipment and gave a note in return. The note promised $100,000 at the end of the four years to be paid on 1/1/2006. The fair market value of the equipment on 1/1/2002 is $63,550.

a. What is the effective interest rate on the note?

b. How much interest expense should be reported on the 2002 year-end financial statements?

c. What is the carrying value of the note on 12/31/2004?

Future and Present Values of an Annuity

1. What is an annuity?

2. What is the equation for the future value of an annuity?

3. What is the equation for the present value of an annuity?

4. How does the term of the interest period (i.e. annual or semiannual) affect the n and I for the present and future value equations?

5. What is the present value of $100 received every year for the next 10 years with an applicable interest rate of 8%?

6. Pepsico bought 4 forklift trucks on 1/1/2002 paying $14,675 cash immediately and assuming a 3-year note payable. The note payable required Pepsico to pay $50,000 at the end of each of the following three years (i.e. on 12/31/2002; 12/31/2003, 12/31/2004). The effective interest rate on the note is 20%.

a. How much interest expense will be recorded over the 3 year period (i.e. what is the total interest expense for the 3 years)?

b. What is the fair market value of each truck on 1/1/2002?

c. By how much did the first payment of $50,000 reduce the amount owed on the note?

7. On January 1, 2002, you acquire a used but elegant Mercedes that had a purchase price of $20,000. The seller agreed to allow you to pay for the car over a two-year period at 10% interest with equal payment due at the end of 2002 and 2003. What is the amount of each annual payment you must make?

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