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Exam 7: Accounting for Liabilities

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Question 61

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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 signed a contract with the Mid-Rivers Bank for a line of credit that permitted Spencer to borrow up to $50,000. Indicate the effects of signing this contract. $\begin{array}{|l|l|l|l|l|l|}\text { Assets Liabilities } & \text { Equity } & \text { Revenues } & \text { Expenses } & \begin{array}{c}\text { Net } \\\text { Income }\end{array} & \begin{array}{c}\text { Cash } \\\text { Flow }\end{array}\\\hline&&&\end{array}$

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Question 62

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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. $\text { Increase } = \mathrm { I } \quad \text { Decrease } = \mathrm { D } \quad \text { No Effect } = \mathrm { N }$ Calvert Company remitted to the state government $4,581 in sales taxes that it had collected from its customers. $\begin{array}{|l|l|l|l|l|l|}\text { Assets Liabilities } & \text { Equity } & \text { Revenues } & \text { Expenses } & \begin{array}{c}\text { Net } \\\text { Income }\end{array} & \begin{array}{c}\text { Cash } \\\text { Flow }\end{array}\\\hline&&&\end{array}$

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Question 63

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Classified balance sheets are useful for assessing a company's liquidity and solvency.

A line of credit typically has an interest rate that is fixed (constant) for the length of the agreement.

Rugh Company has been sued by two customers who claim to have been injured by products Rugh sold. The two lawsuits are unrelated to each other. For lawsuit #1, Rugh expects to lose the suit, and its attorney estimates that the amount of the damages awarded to the customer will be $500,000. For lawsuit #2, Rugh believes that loss of the suit is possible but not probable. The attorney thinks the amount of the damages may be $15,000. Required: Describe the correct accounting treatment for lawsuit #1 and lawsuit #2.

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, Washta Company made the annual payment on a long-term note. The payment included a reduction in the principal balance and payment of interest for the year. Show how this annual payment affected Washta's financial statements. $\begin{array}{|l|l|l|l|l|l|}\text { Assets Liabilities } & \text { Equity } & \text { Revenues } & \text { Expenses } & \begin{array}{c}\text { Net } \\\text { Income }\end{array} & \begin{array}{c}\text { Cash } \\\text { Flow }\end{array}\\\hline&&&\end{array}$

Companies that offer warranties on their products record the warranty expense at the time they provide service to customers under the terms of the warranty.

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. The amount of principal repayment included in the December 31, 2014 payment is:

Indicate whether each of the following statements about sales tax is true or false: 1. Remitting to the state the amount of sales tax collected on sales is a claims exchange transaction 2. Collecting sales tax from a customer is an asset source transaction 3. If a company records a $100 sale that is subject to a sale tax rate of 6%, it should record Sales Revenue in the amount of $94 4. The amount a company owes to the state for sales tax it has collected is a current liability 5. When a company records sales tax it has collected from a customer, it records Sales Tax Expense and Sales Tax Payable

How will the effective interest rate method of amortization affect the interest expense incurred on a bond issued at a premium?

In accounting for a contingent liability, if the likelihood of the obligation is probable and the amount can be estimated, a company must

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

A current asset is

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. On December 31, 2014, Quimby made the appropriate year-end adjustment to record the warranty expense related to the goods sold during the year. During 2015, Quimby paid $14,500 cash to satisfy warranty claims. Show the effects of the 2014 warranty settlements. $\begin{array}{|l|l|l|l|l|l|}\text { Assets Liabilities } & \text { Equity } & \text { Revenues } & \text { Expenses } & \begin{array}{c}\text { Net } \\\text { Income }\end{array} & \begin{array}{c}\text { Cash } \\\text { Flow }\end{array}\\\hline&&&\end{array}$

Walden Company offers a six-month warranty on all the merchandise it sells. For 2014, total sales were $528,000. The company estimates that its warranty cost will be 2% of sales. During the year, the company paid $6,100 for repairs provided to customers. Required: Indicate how the company's financial statements would be affected by a) the sales during 2014 b) warranty expense c) payment for repairs Use 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).

Bonds payable are usually classified on the balance sheet as:

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. With this loan, the amount of interest expense that Rush reports on its income statement will be the same for each year of the loan.

Payment of previously-accrued interest on a note payable is a/an

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 shows the effect of the December 31, 2014 payment? (Figures rounded to nearest dollar)

A bond is issued at a discount when its face value is greater than its issue price.