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Exam 9: Reporting and Interpreting Liabilities

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Question 1

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Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The liability reported on the balance sheet as of the purchase date, after the initial $10,000 payment was made, is closest to:

A) $44,633.
B) $50,000.
C) $54,633.
D) $60,000.

E) None of the above
F) All of the above

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Question 2

Multiple Choice

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If income tax expense reported on the income statement is $45,000 for 2016, and the tax return for 2016 (the first year) shows an income tax liability of $42,000, the deferred income tax on the balance sheet at the end of 2016 will be which of the following? Assume a 40% tax rate.

A) A $3,000 liability.
B) A $3,000 asset.
C) A $7,500 liability.
D) A $7,500 asset.

E) A) and D)
F) A) and C)

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Question 3

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The journal entry to record a contingent liability creates an accrued liability on the balance sheet and a loss on the income statement.

Which of the following is not a current liability?

You have been asked to compute the cash equivalent price of a machine assuming the cost (including principal and interest) is to be paid in two unequal payments after the acquisition date. Which of the following table values would be used to find the cost of the machine?

Darwin Corporation's attorney has provided the following summaries of three lawsuits against Darwin: • Lawsuit A: The loss is probable and the loss can be reasonably estimated. • Lawsuit B: The loss is reasonably possible and the loss cannot be reasonably estimated. • Lawsuit C: The loss is reasonably possible and the loss can be reasonably estimated. Which of the following statements is incorrect?

Which of the following best describes the accrual of interest?

Information Company purchased an asset with a cash equivalent value of $70,000 on January 1, 2016. Arrangements were made with the supplier to pay $10,000 cash on January 1, 2016, and the balance was to be paid over a three-year period, with equal annual payments of $24,553 to be made at the end of 2016, 2017, and 2018. Each payment will include principal plus interest on the unpaid balance at 11% per year. Required: A.Complete the following table: B.Prepare the journal entry for the payment on December 31, 2017. C.Explain the change, over time, on the amount of interest and the balance of the debt principal.

Young Company is involved in a lawsuit. When would the lawsuit be recorded as a liability on the balance sheet?

Phipps Company borrowed $25,000 cash on October 1, 2016, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. Assuming that adjusting entries have not been made during the year, the amount of accrued interest payable to be reported on the December 31, 2016 balance sheet is which of the following?

A company's income statement reported net income of $80,000 during 2016. The income tax return excluded a revenue item of $6,000 (reported on the income statement) because under the tax laws the $6,000 would not be reported for tax purposes until 2017. Which of the following statements is incorrect assuming a 35% tax rate?

Sharp Company borrowed $500,000 on a 6% one-year, interest-bearing note dated November 1, 2016 with interest payable at maturity. The annual accounting period ends on December 31. Assume that adjusting entries are only made at December 31, the company's fiscal year-end. Required: Prepare journal entries for each of the following dates: A.November 1, 2016. B.December 31, 2016. C.October 31, 2017.

Which of the following results in a decrease in working capital?

Which of the following statements about contingent liabilities is incorrect?

Houston Company is involved in a lawsuit. In which of the following situations is only a note disclosure of the contingent liability reported within the financial statements?

Rice Corporation's attorney has provided the following summaries of three lawsuits against Rice: • Lawsuit A: The loss is probable, but the loss cannot be reasonably estimated. • Lawsuit B: The loss is reasonably possible, but the loss cannot be reasonably estimated. • Lawsuit C: The loss is reasonably possible and can be reasonably estimated. Which of the following statements is correct?

Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2016. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2016 and continuing for a total of four more years (final payment December 31, 2020) . Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. Upon the first payment of the note on December 31, 2016, the amount of interest expense to be recorded is:

Answer the following four questions. A.What is a contingent liability? B.When must a contingent liability be recorded through a journal entry? C.When should a contingent liability be disclosed in the footnotes to the financial statements? D.When is disclosure of a contingent liability not required?

Which of the following questions is asked with respect to determining the accounting for leases?

On January 1, 2016, Mission Company agreed to buy some equipment from Anna Company. Mission Company signed a non-interest-bearing note, agreeing to pay Anna Company the entire $500,000 for the equipment on December 31, 2018. The market rate of interest for this note was 10%. Required: (Round all answers to whole dollar amounts.) A.Prepare the journal entry Mission Company would record on January 1, 2016 related to this purchase. B.Prepare the December 31, 2016, adjusting entry to record interest expense related to the note for the first year.Assume that no adjusting entries have been made during the year. C.Prepare the December 31, 2017, adjusting entry to record interest expense related to the note for the second year.Assume that no adjusting entries have been made during the year. D.Prepare the entry Mission Company would record on December 31, 2018, the due date of the note to record interest expense for the third year and payment of the note.Assume that no adjusting entries have been made during the year.Round the interest expense to an amount that will increase notes payable to the correct final payoff amount.