Exam 7: Accounting for Liabilities

The following is a list of balance sheet accounts (in random order) and balances for the Community Naval Supply Company. They have been updated as of December 31, 2012. Building \ 30,000 Land 10,000 Retained Earnings 40,000 Notes Payable (due in 3 17,000 years) Inventory 60,000 Equipment 12,000 Accounts Payable 14,000 Common Stock 60,000 Accum. Deprec. - Building 10,000 Accum. Deprec.- Equipment 4,000 Cash 10,000 Unearned Revenue 2,000 Accounts Receivable 25,000 Required: Prepare a classified balance sheet for Community Naval Supply Company at December 31, 2012.

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. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ Ransom Company borrowed $10,000 by issuing a promissory note. The note was for twelve months at an annual interest rate of 8%. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Accounts payable and notes payable are reported on the balance sheet at net realizable value.

On January 1, 2014, Muller Co. borrowed cash from Washington Valley Bank by issuing a $100,000 face value 3-year installment note payable that carried a 7% interest rate. The note is to be repaid by making annual cash payments of $38,105, which includes both principal and interest. The payments are to be made on December 31 of each year. Required: a) Prepare an amortization schedule for the term of the loan, showing the amounts to be paid on principal and interest for 2014, 2015, and 2016 and the loan balance at the end of each year. b) What amount of interest expense will be shown on the 2015 income statement? c) What amount of liability for the note will be shown on the balance sheet on December 31, 2015?

On January 1, 2014, Sol Company issued bonds with a face value of $100,000 at 105. The bonds will mature in 5 years. Interest at 10% was payable in cash on December 31 of each year. The premium will be amortized using the straight line method. Based on this information, the amount of interest expense shown on the 2014 income statement and the cash flow from operating activities shown on the 2014 statement of cash flows would be: Interest Cash Expense Outflow A) \ 11,000 \ 10,000 B) \ 9,000 \ 10,000 C) \ 10,500 \ 10,000 D) \ 10,000 \ 10,000

Current liabilities as of December 31, 2014 are the

On January 1, 2014, Luna Company issued bonds with a face value of $300,000 at 95. The bonds will mature in 5 years. Interest at 9% was payable in cash on December 31 of each year. The discount will be amortized using the straight line method. Based on this information, the amount of interest expense shown on the 2014 income statement and the cash flow from operating activities shown on the 2014 statement of cash flows would be:

On December 31, 2013, Malcolm Corporation accrued interest on a $10,000 note payable that it had issued on March 1, 2013. The note was a 1-year note with interest at 6%. How did the year-end accrual of interest affect Malcolm's financial statements?

Which of the following reflects the effect of the year-end adjusting entry to record estimated warranty expense?

Discuss the advantages of establishing a line of credit.

Installment notes are loans that require payment of interest at regular intervals and payment of principal at maturity.

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. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ At December 31, Ransom Company recorded the interest that had accrued on its outstanding note payable. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Which of the following items would be least likely to appear in the current liabilities section of a classified balance sheet?

Indicate whether each of the following statements is true or false. 1. The portion of a long-term liability due within one year or the operating cycle must always be classified as a current liability 2. Current liabilities are those liabilities that are usually repaid using current assets 3. The liquidity of an asset refers to how recently the asset was received 4. A current liability is due within one year or the operating cycle, whichever is longer 5. The balance sheets for most companies show current assets and current liabilities

Which of the following items is not classified as a current asset?

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 December 31, 2014, Spencer Corporation had a balance of $20,000 on a line of credit with Mid-Rivers Bank. Spencer made a payment of $11,200, which included $10,000 on the principal and $1,200 interest. Show the effects of this transaction on Spencer's financial statements. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Saba Company borrowed $10,000 from the bank by issuing a promissory note on June 1, 2014. The note had a one-year term and a 6 percent annual interest rate. On December 31, 2014, Saba accrued the interest on the note. Required: Show how the issuance of the note and accrual of interest 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).

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, Thayer Co. issued $100,000 of bonds payable. On December 31, 2021, when the bonds matured, Thayer used cash to repay the bond principal and interest, which had not been accrued previously. Indicate the effects of the 12/31/21 payment. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

In 2014, the balance sheet of Worth Company incorrectly reported as long term some liabilities that should have been treated as current liabilities. How would this error affect financial statement users' analysis and assessment of the company?

If a company determines that the likelihood of a future obligation arising from a contingent liability is possible, the company must record a liability on its balance sheet.