Exam 7: Accounting for Liabilities

Accrual of interest on a note payable is a/an

Rominger Company borrowed $10,000 from the bank by issuing a promissory note on June 1, 2014. The note had a six-month term and a 6 percent annual interest rate. On November 30, 2014, Rominger paid principal and interest on the note. Required: Show how the issuance of the note and payment of principal and interest at maturity affect the financial statements by using the horizontal model provided. Indicate the dollar amount of increases and decreases; enter NA if an item is not affected. In the cash flows column, designate cash flows as operating activities (OA), investing activities (IA. or financing activities (FA).

In accounting for a contingent liability, if the likelihood of the obligation is probable but the amount cannot be estimated, a company must

Rush Corporation borrowed $50,000 on January 1, 2014. The loan is for a five-year period and has an annual interest rate of 8%. At the end of each year, Rush will make a payment of $12,522.82, which includes both principal and interest. The amount of the payment for 2012 that is reduction of principal is $8,502.82.

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ On January 1, 2014, Washta Company issued a long-term note. The note required an annual payment that included a reduction in the principal balance and the payment of interest. Show how the issuance of the note affected the financial statements. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Indicate whether each of the following statements about product warranties is true or false. 1. Warranty Expense is recorded at the time a company provides service to a customer under the terms of the warranty 2. Providing service to a customer under a product warranty is a claims exchange transaction 3. Recording an obligation for a warranty does not affect the statement of cash flows 4. Generally, a company that offers warranties on its products must report a liability on the balance sheet 5. The entry to record warranty expense is an asset use transaction

On January 1, 2014, Fleming Company borrowed $160,000 cash from the First Trust Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, 2014. The annual payment on the loan was $40,074. Which choice reflects the financial statement effects of Fleming Company's cash payment on December 31, 2014?

How are interest rates normally set for lines of credit?

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ Quimby Co. sells goods to customers with a three-year warranty. During 2014, Quimby sold $600,000 of goods. On December 31, 2014, Quimby made the appropriate year-end adjustment to record the warranty expense related to the goods sold during the year. Show the effects of the December 31, 2014 adjustment. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

On December 27, 2014, Terrell Corp. signed an agreement for a line of credit with the Barnett Bank. Under the agreement, Terrell can borrow up to $50,000 at any time during the following year. Terrell will make any borrowings or paybacks on the first day of a month and make interest payments on the last day of any month when a balance exists. The annual interest rate will be the bank's prime rate plus 1% and will be applied to the outstanding monthly balance. The following table gives the appropriate information for the first three months of 2015. Amount Borrowed or (Repaid) Prime Rate January \ 20,000 4\% February 20,000 4.5\% March (15,000) 5\% Determine the amount of interest to be paid at the end of each of the three months.

Sports Corporation decides to sell debenture bonds to raise $10,000. This is a/an

Under what circumstances is a contingent liability not reported on the balance sheet?

Villarente Company issued 5-year $200,000 face value bonds at 95 on January 1, 2012. The stated interest rate on these bonds is 9%, and the effective interest rate is 10.33%. Use the effective interest rate method to complete the amortization schedule below.

Indicate whether each of the following statements is true or false: 1. A cash payment for principal of a note payable is an asset use transaction 2. When a company issues a promissory note, it should recognize a cash flow from financing activities 3. The cash payment for interest on a note payable is reported on the statement of cash flows as a cash outflow from operating activities 4. A cash payment for principal of a note payable is reported on the statement of cash flows as a cash outflow from investing activities 5. The year-end adjusting entry to accrue interest on a note payable is an asset use transaction

Nevada Company paid to the state $1,800 in sales tax that it had previously collected from customers. What type of transaction was this?

Discuss the purpose of long-term debt financing.

On March 1, 2014, Cross Corporation borrowed $10,000 by issuing a note payable. How did this transaction affect Cross's financial statements?

The Halogen Corporation issued a 5-year note payable on January 1, 2014 for $2,500. The interest rate is 5% and the annual payment of $578, due each December 31, includes both interest and principal. Which of the following correctly shows the effects of the December 31, 2015 payment?

Discount on bond payable is a/an

If a company's operating cycle is 90 days long, the company would use a period of one year to identify current assets and current liabilities.