Exam 7: Accounting for Liabilities

Pella Company issued bonds with a face value of $3,000,000 on January 1, 2014. The bonds were issued at face value and carried a 4-year term to maturity. Interest at 9% was payable in cash on December 31 of each year. Based on this information alone, 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:

Roskos Corporation issued to Ewold Bank a two-year, $200,000, 6% interest-bearing note on August 1, 2014. Interest is paid annually on July 31. Principal and the final interest payments are to be made on July 31, 2016. Using the financial statements model provided, indicate the effect on Roskos' financial statements of: a) the issuance of the note payable. b) Roskos' adjusting entry on 12/31/14. c) the first interest payment on 7/31/15. Include dollar amounts of increases and decreases. Also, indicate whether cash flows are operating activities, investing activities, or financing activities.

A contingent liability is

San Jose Company issued 5-year $200,000 face value bonds at 105 on January 1, 2012. The stated interest rate on these bonds is 9%. Use the straight line method to complete the amortization schedule below.

Applegate Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on Knight's statements?

Osgood Company estimated that its warranty expense would be $2,125 for the current year. During the year, Osgood paid $950 to repair merchandise that was returned by customers. a) What type of transaction is the recording of warranty expense? b) If this is the first year of operations, what is the amount of warranty liability that will be shown on the balance sheet at the end of the year?

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 March 17, Ransom Company paid the interest that was due on a note payable. Part of the interest had been accrued at the end of the previous accounting period. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Chicago Company sold merchandise to a customer for $600 cash in a state with a 6% sales tax rate. The total amount of cash collected from the customer was

Sandusky Company borrowed $10,000 from the Lakeside Bank by issuing a 10% three-year installment note. Sandusky agreed to repay the principal and interest by making annual payments in the amount of $4,021.15. Based on this information, the amount of the interest expense associated with the second payment would be: (round your answer to the nearest dollar)

For a long-term note payable, repaying a portion of principal along with interest payments is called loan amortization.

What is the going concern assumption?

Locke Company issued bonds payable. Which of the following choices accurately reflects how the issue would affect Locke's financial statements?

What is solvency? How could you measure solvency based on a company's financial statements?

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. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ Terrace Company examined its contingent liabilities and determined that for one of the liabilities, the likelihood of a future obligation was probable and that the amount could be estimated. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

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, Spencer Corporation borrowed $20,000 on a line of credit from Mid-Rivers Bank. Show the effects of this transaction on Spencer's financial statements. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

On a classified balance sheet, the financial statement user will be able to distinguish between:

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. On January 1, 2013, Hays borrowed an additional $1,000 from Barnett Bank, bringing the total amount borrowed to $2,000. On January 1, 2014, Hays paid $500 on the principal of the loan. On December 31, 2014, Hays records the 2014 interest payment. The prime rate for 2014 was 5 percent. Which of the following answers shows the effect of the 2014 interest payment on the financial statements? Assets = Liabilities + Equity Revenue - Expenses = Net Inc. Cash A) (75) = (75) + NA NA - NA = NA (75) FA B) (75) = NA + (75) NA - 75 = (75) (75) OA C) (90) = (90) + NA NA - NA = NA (90) FA D) (90) = NA + (90) NA - 90 = (90) (90)

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, Sweetwater Co. paid cash for interest on bonds it had issued on January 1, 2014. Indicate the effects of the payment of interest. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

Knowles Company issued $100,000 of bonds at face value on January 1. The bonds carry an 8% annual stated rate of interest. Interest is payable in cash on December 31 of each year. Which of the following reflects the financial statement effects of the first interest payment?

Quayle Company has been sued by a customer who claims injury from use of Quayle's product. The company's lawyers and a consultant believe that the likelihood of a judgment against Quayle is remote. What should Quayle do to account for this potential liability?