Exam 7: Accounting for Liabilities

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. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ In accounting for contingent liabilities, Terrace Company determined that for one of the liabilities, the likelihood of a future obligation was remote. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow

What is the operating cycle? How is the operating cycle used in classifying a business's assets and liabilities?

How does the amortization of the principal balance affect the amount of interest expense recorded each succeeding year?

When does warranty cost appear on the statement of cash flows?

What are examples of events that give rise to contingent liabilities?

How is the current portion of long-term liabilities reported on a classified balance sheet?

Upton Company obtained an $80,000 line of credit from the Key State Bank on January 1, 2014. The company agreed to accept a variable interest rate that was set at 2% above the bank's prime lending rate. The bank's prime rate of interest and the amounts borrowed or repaid during the first three months of 2014 are shown in the following table. Assume that Upton borrows or repays on the first day of each month. Borrowing is shown as a positive amount and repayments are shown as negative amounts indicated by parentheses. The amount of interest expense recognized in March, rounded to the nearest dollar, would be:

Orzoff Electronics offers a six-month warranty on the products it sells. It estimates the warranty expense will be 3 percent of sales. One of the company managers wondered how the warranty affects the company's profit. The income statement for the most recent year was: The manager estimates that if the company did not offer the warranty, sales and cost of goods sold would both decrease by 30 percent and selling and administrative expenses would decrease by 20 percent. Based on this information, would you recommend that the company discontinue the warranty? Prepare an income statement to support your answer.

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 paid the first year's interest payment on December 31, 2014. Barnett Bank's prime rate was 4 percent for 2014. Which of the following answers shows the effect of this event on the financial statements?

In accounting for a contingent liability, if the likelihood of the obligation is remote, a company should

Company N has a 5-year note payable that will mature (come due) on March 17, 2014. Company N has an agreement with a local bank to refinance the liability by issuing a new note payable. On its December 31, 2013 balance sheet, N should

Taos Company sold goods to a customer for $100 and collected $7.50 in sales taxes. What type of transaction is the collection of the sales tax?

Company T's operating cycle is approximately 2 years long. Company T's note payable maturing in 15 months should be classified as a long-term liability.

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 and the discount amortization in 2014 are

General uncertainties, such as the effect of competition on a business's operations, are not accounted for as contingent liabilities.

What criterion is used for classifying assets as current? Provide three examples of current assets.

Which of the following would not be classified as a current asset?

What is a bond discount? What is a bond premium? How do they affect the interest expense on bonds?

Garza Corporation sold merchandise to a customer for $4,000 subject to sales tax at 8%. The effects on the financial statements were:

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 repaid the principal on a note payable. Assets Liabilities Equity Revenues Expenses Net Income Cash Flow