Exam 9: Current Liabilities and Contingent Obligations

The following information is given for Airflight Airlines: -As of December 31, 2015, Airflight had $10,000 of notes coming due on January 30, 2016. Also as of December 31, 2015, Airflight was negotiating to issue long-term debt so that it could use the proceeds to liquidate these short-term notes as they mature. On January 4, 2016, the company used $3,000 of excess cash to pay off part of the note. On January 29, 2016, a refinancing of the entire $10,000 was completed. The $3,000 was replaced and the rest of the notes were extended for another two years. -Airflight has negotiated a long-term refinancing contract which permits Airflight to borrow an up to 60% of accounts receivable balances to refinance debt. Accounts receivable are expected to range between $12,000 and $16,000 next year. -Airflight also has negotiated a new long-term refinancing contract which permits Airflight to borrow an amount up to 35% of inventory to refinance debt. Inventory is expected to range between $75,000 and $85,000 next year. Required: a. On the December 31, 2015 balance sheet, how much of the $10,000 note should be shown as short-term? b. Airflight has a currently maturing note payable of $20,000 related to the accounts receivable refinancing contract. How much of the $20,000 note payable can be classified as long-term debt at the end of 2015? c. Compute the amount of the company's currently maturing note payable of $50,000 related to refinancing inventory that must be classified as short-term debt on December 31, 2015.

The Lawrence Company records its trade accounts payable net of any cash discounts. At the end of 2016, Lawrence had a balance of $300,000 in its trade accounts payable account before any adjustments related to the following items: 1) Goods shipped to Lawrence FOB shipping point were in transit on December 31. The invoice price of the goods was $50,000, with a 2% discount allowed for prompt payment. Goods shipped to Lawrence FOB destination on December 29 arrived on January 2, 2017. 2) The invoice price of the goods was $9,000, with a 4% discount allowed for payment within 20 days. On December 10, Lawrence had recorded a shipment received. The recorded invoice price 3) was $24,750, net, with a 1% discount allowed for payment within 14 days. At the end of the year, payment had not been made. At what amount should Lawrence report trade accounts payable on its December 31, 2016 balance sheet?

Cunningham, a branch manager, is allowed a bonus of 10% of income after bonus and tax. If the tax rate is 30% and income before bonus and tax is $200,000, what is Mr. Cunningham's bonus?

Which of the following statements is false?

The Antarctica Company closes its books annually on December 31, while the city in which it is located has a fiscal year beginning on April 1 and ending on March 31. Taxes on property are assessed on April 1 of each year. Property taxes in the amount of $360,000 and $390,000 were assessed on April 1, 2015 and 2016, respectively. For the year ended December 31, 2016, the Antarctica Company would report property tax expense of

Under what conditions can a short-term obligation be classified as a long-term liability?

Current liabilities are obligations whose liquidation is reasonably expected to require the use of existing current assets or the creation of other current liabilities within

Which of the following journal entries would probably be made if the modified cash basis of accounting for warranties is in use for a sale made in 2016?

Which of the following statements regarding the gross and net methods for recording trade accounts payable is true?

A client is involved in several different lawsuits that are all pending at the end of its fiscal year. The controller wants to know if the cases must be accrued in the accounts, disclosed in the footnotes, or neither of these. Required: Write an explanation of the criteria used to determine whether an accrual or a disclosure is required for loss and gain contingencies.

Which of the following dividends is not considered a current liability when declared?

On the balance sheet, liabilities are generally classified as

The ability to utilize financial resources and to adapt to changes in the business environment is referred to as a company's financial flexibility.

Assume that a company is facing a loss contingency. GAAP requires the company to recognize a liability even if the company cannot determine whether or not the event has occurred.

The FASB established the use of the terms "probable," "reasonably possible," and "remote." It adopted these terms because

Exhibit 9-4 During 2016, the Thomas Company began selling a new type of machine that carries a two-year assurance-type warranty against all defects. Based on past industry and company experience, estimated warranty costs should total $2,000 per machine sold. During 2016, sales and actual warranty expenditures were $4,000,000 80 machines) and $44,000, respectively. Thomas uses the GAAP approach of accruing warranty expense and the related liability) in the year of the sale. -Refer to Exhibit 9-4. What amount should Thomas report as its estimated warranty liability at December 31, 2016?

A probable loss contingency is reasonably estimated within a range of possible amounts. No amount within the range is a better estimate than any other amount within the range. The amount that should be accrued should be

Which of the following is not a characteristic of a liability?

IFRS accounting for contingencies differs from U.S. GAAP in several details. Briefly describe three of those differences.

Which of the following is the most appropriate way to display liabilities on the balance sheet?