Exam 7: Accounting for Liabilities

Vacation pay and sick leave are examples of contingent liabilities that a company generally should recognize on its financial statements.

In accounting for a contingent liability, if the likelihood of the obligation is possible, a company must

If a company has a contingent liability where the likelihood of a future obligation is remote, the company need not record or disclose the liability.

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 answers correctly shows the effect of the issuance of the note on Halogen's financial statements?

At the beginning of 2014, Orendi Designs, Inc. had a balance in the Warranty Payable account of $10,500. During the year, Orendi sold several products that carried a two-year warranty for $450,000. Orendi estimated that warranty expense would be 5% of sales for the year. a) What is the amount of warranty expense for 2014? b) If Marianne paid warranty costs of $23,000 during 2014, what is the balance in the Warranty Payable account after the adjusting entry is made?

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, Ortiz Co. paid $100,000 to retire its bonds payable that matured on that date. Indicate the effects of retiring these bonds. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Paul's Valley Company issued bonds with a $10,000 face value on January 1, 2014. The bonds were issued at face value and carried 5-year term to maturity. They had a 5% stated rate of interest that was payable in cash on January 1 of each year beginning January 1, 2015. Based on this information alone, the amount of total liabilities appearing on the December 31, 2014 balance sheet would be:

Juneau Company issued 5-year $200,000 face value bonds at 95 on January 1, 2014. The stated interest rate on these bonds is 9%. If the effective interest rate is 10.33%, interest expense in 2014 is equal to

Which financial statements are affected by the entry to record the payment of bond interest? Indicate how each statement is affected.

Long-term debt would likely be used for which of the following?

Providing repair services to a customer under the terms of a product warranty is a/an ________ transaction.

On November 1, 2014, Fain Corporation paid principal and interest on a 6-month, 8% note payable with a face amount of $5,000. How did this transaction affect Fain's financial statements?

Saam Company borrowed $40,000 from the bank on December 1, 2014. The note had an 8 percent annual interest rate and matured on May 31, 2015, when Saam paid the principal and interest on the note. Required: a) What amount of cash did Saam pay for interest in 2014? b) What amount of interest expense did Saam report on the 2014 income statement? c) What was the amount of liabilities that Saam reported on its balance sheet at the end of 2014? d) What was the amount of cash that Saam paid to the bank on May 31, 2015? How was the cash payment reported on the statement of cash flows? e) What amount of interest expense was reported on the 2015 income statement?

The Candy Junction operates two candy stores. Sales at the two stores in 2014 were $320,000 and $201,000; these amounts do not include sales tax. Both stores are in a state with a 5% sales tax rate. Required: a) What is the total amount of sales tax that the stores collected in 2014? b) What kind of transaction is the collection of the sales tax? (asset source, asset use, asset exchange, claims exchange). c) At the end of the year, the company remitted the sales tax to the state. What kind of transaction is the remission (payment) of the sales tax?

Rosen Hardware Company recorded the following sales for the first quarter of 2014: These amounts do not include sales taxes. The company is in a state with a sales tax rate of 6 percent. Required: a) Calculate the amount of sales tax that the company collected from its customers for each month. b) For each month, indicate the effect of the sales and collection of sales tax on the statements model, below. Show dollar amounts 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). c) On March 31, Rosen Hardware remitted to the state the total amount of sales tax for the quarter. Indicate in the statements model the effect of this transaction.

When a warranty repair job is completed, what is the effect on the accounting equation?

Indicate whether each of the following statements is true or false. 1. Accounts payable is classified as a current asset 2. Accounts receivable is classified as a current asset 3. A current asset will be converted into cash or consumed within one year or an operating cycle 4. Prepaid insurance is a current liability 5. The receipt of a customer's advance payment for a service to be performed during the next three months is a current liability

When should warranty expense be recognized?

On January 1, 2014, Hays Corporation arranged a $3,000 line of credit with the Barnett Bank. It agreed to accept the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and payments on principal are to take place on January 1 of each year. Hays began its loan transactions with Barnett Bank by borrowing $1,000 on January 1, 2014. Which of the following answers shows the effect of this event on the financial statements?

Explain the reason that interest expense may decrease each year during the life of a long-term note payable. How is the amount of interest expense normally computed?