Exam 10: Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies

Which one of the following is the result of the amortization of a discount on a short-term note payable?

Beacon Incorporated owns a chain of retail stores. During December of 2017, a customer slipped in a doorway of its Virginia store and broke his ribs. He is suing Beacon for $200,000 for negligence. Beacon's legal counsel believes that it is remote that Beacon will lose its defense of the lawsuit because the doorway recently was rebuilt with all-weather traction stripping and a sign on the door warned customers that the doorway was slippery when icy. On December 30, 2017, before considering the effects of this lawsuit, Beacon's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively. After this event is properly accounted for, calculate Beacon's debt/asset ratio on December 31, 2017.

A company has a decreasing current ratio. Creditors should be concerned

Explain why short-term notes often have a face amount that differs from the cash received upon signing a note payable. Describe what this difference represents.

If the current ratio is currently greater than 1.0, which one of the following events would increase the current ratio?

How is unamortized interest on short-term notes payable reported on a balance sheet?

Bradley Incorporated owns a chain of retail stores. During December of 2017, a customer slipped in a doorway of its Missouri store and broke his ribs. He is suing Bradley for $200,000 for negligence. Bradley's legal counsel believes that it is only reasonably probable that Bradley will lose its defense of the lawsuit because, although the doorway was icy due to an ice storm that was occurring at the time of the fall, a sign on the door warned customers that the doorway was slippery when icy. On December 30, 2017, before considering the effects of this lawsuit, Bradley's current assets, total assets, current liabilities, and total liabilities were $420,000, $840,000, $100,000, and $300,000, respectively. After this event is properly accounted for, calculate Bradley's debt/equity ratio on December 31, 2017.

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively. If Jake invests $50,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what would be its current ratio?

Identify the primary problem related to current liabilities.

Howell Incorporated current income statement and December 31 balance sheet follow: Income Statement Revenue \ 180,000 Expenses and losses Net income Balance Sheet Current assets \ 10,000 Long-lived assets Total assets Current liabilities \ 5,000 Long-term liabilities 95,000 Shareholders' equity Total liabilities and shareholders' equity During an audit of Howell's current financial statements, its auditor discovered that Howell is a defendant in a $20,000 lawsuit for infringement of patent rights. Howell's management, under the advice of its legal counsel, decided that it was only reasonably possible that they would lose the suit and have to pay $20,000. However, its auditor disagreed with the treatment of the contingent loss and effectively argued that it is probable that the lawsuit will require Howell to pay $20,000 in the forthcoming year. The management of Howell decided to "take a bath" and treat the $20,000 lawsuit consistent with GAAP on probable conditional liabilities. A. Reconstruct Howell current income statement and 12/31 balance sheet under the auditor's judgment concerning the $20,000 lawsuit B. Calculate and compare current, debt/equity, and debt/asset ratios resulting from Howell's initial and reconstructed financial statements. Comment on Howell's solvency.

Use the information from Cen, Inc. to answer questions Cen, Inc. reported the following on its December 31, 2017, balance sheet: Current liabilities: 2017 2016 One-year short-term notes payable, net of discount of \ 9,800 \ 6,400 \ 300 and \ 400 , respectively Accrued interest on notes payable 340 280 Current portion of long-term debt 1,250 2,340 Trade accounts pavable 500 700 -How much is the maturity value of the one-year note payable that is outstanding at the end of 2017?

Contingent liabilities whose ultimate payment is highly probable and can be reasonably estimated must be

Julia Used Cars offers a one-year warranty from the date of sale on all cars it sells. From historic data, Bill Julia estimates that, on average, each car will require the company to incur warranty cost of $820. The cars sold for an average of $9,500 each. The following activities occurred during 2017. Feb 4 Sold five cars. Mar 23 Sold ten cars. May 20 Incurred warranty costs of \6 ,000 an four cars sold in 2016. July 6 Sold eight cars. Sep 1 Incurred warranty costs of \5 ,000 on five cars sold in 2016. Nov 14 Incurred warranty costs of \4 ,000 on one car sold in 2016. Dec 22 Sold twelve cars. If Julia accrued its warranty liability with a single adjusting entry at year-end, the journal entry would include:

A contingent liability

Meadville Industries sells gift certificates that are redeemable in merchandise. During 2017, Meadville sold gift certificates for $88,000. Merchandise with the total price of $52,000 was redeemed during the year. For Meadville, the cost of the merchandise sold was $32,000. Meadville sold gift certificates for the first time in 2017. The journal entry recording the sale of the gift certificates will include:

On December 31, 2017, Barton Incorporated had total liabilities of $60,000 and total shareholders' equity of $90,000, resulting in a debt/equity ratio of 0.67 before income tax expense is recognized. On December 31, 2017, Barton paid its 2017 income taxes of $6,000 while its income tax expense on its 2017 income statement was $8,000. This difference exists because Barton uses straight-line depreciation on its books and double-declining-balance depreciation on its tax returns. What is Barton's debt/equity ratio after the tax expense and deferred tax liability are recognized?

In addition to recognizing income tax expense, the accounting necessary to record income taxes requires

Collecting sales taxes from customers always

One of Tonic Corp's employees invented a revolutionary coffee lid that cools coffee as you drink it in order to prevent burns. Two children ordered coffee and burned their mouths after failing to properly secure the lids. The children's parents sued. Tonic Corp's. lawyers believe that it is highly probable that judgment will be rendered against Tonic Corp and it is likely a payment in excess of $2 million will be incurred. The proper accounting treatment of the lawsuit will

The following information was taken from the annual report of Leno Inc. BALANCE SHEET Deferred incame tax liability INCOME STATEMENT Incame befare taxes \ 109,000 Incame tax expense (40,400) Net incame Effective incame tax rate 35\% What is Leno's conservatism ratio?