Question 1

What concerns might exist when a company's debt ratio increases?

Accepted Answer

The answer of What concerns might exist when a company's...

Question 2

On July 1, Falcon Company borrowed $2,000 in return for a one-year note payable with a maturity value of $2,200. Calculate the balance sheet value of the note on December 31.

Accepted Answer

The answer of On July 1, Falcon Company borrowed $2,000...

Question 3

On March 2, 2010, Knight Company's CFO, Bob Martin, will receive a bonus equal to 6% of net income before income taxes as reported for the year ended December 31, 2009. The current 2009 income statement shows net income before income taxes as $600,000.
Required:
(1) What journal entry should be made on December 31, 2009?
(2) What journal entry should be made on March 2, 2010?
(3) If Bob decides to postpone $50,000 of 2009 research and development expenditures until 2010, what impact would this have on his bonus? Explain and show your calculations.

Accepted Answer

The answer of On March 2, 2010, Knight Company's CFO,...

Question 4

On October 1, Accurate Company borrowed $2,000 in return for a nine-month note payable with a maturity value of $2,600. Calculate the amount of interest expense and the balance sheet value for the year ending December 31.

Accepted Answer

The answer of On October 1, Accurate Company borrowed $2,000...

Question 5

What concerns might management have with additional debt on its balance sheet?

Accepted Answer

The answer of What concerns might management have with additional...

Question 6

Which one of the following would most likely be reported as a current liability?

Accepted Answer

A)  Frequent flyer program miles accumulated by airline travelers 
B)  Self insurance risks on anticipated losses 
C)  Customers merchandise returns exchanged for different merchandise 
D)  The CEO's stock option package for the current year

Question 7

The following information was taken from the annual report of Leno Inc.
  Based on this information, what journal entry should Leno make in 2010 to record its income taxes?

Accepted Answer

The answer of The following information was taken from the...

Question 8

Deposits payable may arise because

Accepted Answer

A)  cash deposits are received from customers for layaways. 
B)  cash is paid to a creditor as a security deposit that will be refunded in the future. 
C)  the company deposits sales receipts too early. 
D)  merchandise is delivered to customers prior to payment.

Question 9

Porter Products recognizes expenses for wages, interest and rent when cash payments are made. The following related cash payments were made during December 2009:
  As of December 31, the current assets and current liabilities reported on Porter's balance sheet were $36,000 and $22,500, respectively. Porter's income statement reported net income of $11,250.
Required: Compute Porter's current ratio and net income if the company were to account for wages, interest, and rent on an accrual basis.

Accepted Answer

The answer of Porter Products recognizes expenses for wages, interest...

Question 10

Beacon Incorporated owns a chain of retail stores. During December of 2009, 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, 2009, 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, 2009.

Accepted Answer

The answer of Beacon Incorporated owns a chain of retail...

Question 11

Pension expense is

Accepted Answer

A)  accrued each period as employees require payments. 
B)  recognized as a long-term deferred asset. 
C)  accrued as employees earn their rights to future benefits. 
D)  calculated by dividing an employee's annual salary into the number of years the employee is expected to require pension payments.

Question 12

Howell Incorporated current income statement and December 31 balance sheet follow:  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 probable 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.

Accepted Answer

The answer of Howell Incorporated current income statement and December...

Question 13

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?
a. 1.76
b. 2.50
c. 1.44
d. 3.24

Accepted Answer

The answer of Jake Company borrowed $100,000 from Guaranty Trust...

Question 14

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

Accepted Answer

A)  with long-term solvency. 
B)  about the company's ability to pay current debts as they come due. 
C)  about the company's profitability. 
D)  about whether earnings per share is increasing or decreasing.

Question 15

How do 'determinable' current liabilities differ from 'contingent' liabilities?

Accepted Answer

The answer of How do 'determinable' current liabilities differ from...

Question 16

Accounts payable typically arise because

Accepted Answer

A)  cash is received from a customer that will be paid back in the future. 
B)  cash is received from customers prior to the rendering of services or delivery of products. 
C)  the firm temporarily borrows cash for operations. 
D)  amounts are owed to others for goods, supplies, and services purchased on open account.

Question 17

Select the letter of the effect on the ratios (a through c) as a result of each transaction listed in items 1 through 16.
  ____ 1. Purchased supplies on account to be used next month.
____ 2. Paid accounts payable.
____ 3. Issued a $1,000 short-term note payable for $970.
____ 4. Amortized the discount of the short-term note payable.
____ 5. A portion of long-term debt is due next year.
____ 6. Declared cash dividends to holders of stock.
____ 7. Paid the cash dividend previously declared.
____ 8. Received money from customer prior to delivery of the product to the customer.
____ 9. Delivered product to a customer who previously paid for that product.
____ 10. Collected sales tax on behalf of the state government.
____ 11. Accrued payroll taxes the firm has to pay to the federal government within three months.
____ 12. Paid a bonus (not previously accrued) amounting to 5% on reported income to the CEO for the current year.
____ 13. A large payment is remotely probable resulting from a lawsuit filed against the firm.
____ 14. A large payment is reasonably probable resulting from a lawsuit filed against the firm.
____ 15. A $10,000 payment is highly probable resulting from a lawsuit filed against the firm.
____ 16. Bondholder converted bond into stock through conversion feature.

Accepted Answer

The answer of Select the letter of the effect on...

Question 18

What business transaction must occur in order to reduce Estimated Warranty Payable?

Accepted Answer

A)  Goods under warranty are repaired in the period after the sale 
B)  Warranty costs are accrued at the end of the accounting period 
C)  Sale of goods on account 
D)  Customers take advantage of cash discounts for early payment

Question 19

Net worth is

Accepted Answer

A)  assets plus liabilities. 
B)  total income since the company began operations. 
C)  total shareholders' equity. 
D)  another name for net income.

Question 20

Bradley Incorporated owns a chain of retail stores. During December of 2009, 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, 2009, 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, 2009.

Accepted Answer

The answer of Bradley Incorporated owns a chain of retail...

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