Chapter 08 - Current Liabilities
PROBLEMS: SET C
Review current liability terms and concepts
(LO8-1)
P8-1C Listed below are several terms and phrases associated with current liabilities. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it.
List A / List B_____ / 1. Long-term debt maturing within one year. / a. FICA
_____ / 2.Borrowing from another company with maturities up to 270 days. / b. Acid-test ratio
_____ / 3. Classifying liabilities as either current or long-term helps investors and creditors assess this. / c. Accrual accounting
_____ / 4. Cash, short-term investments, and accounts receivable all divided by current liabilities. / d.Recording a contingent liability
_____ / 5. Incurred on a notes payable. / e. Unearned revenues
_____ / 6. Interest expense is recorded in the period interest is incurred rather than in the period interest is paid. / f. The riskiness of a business’s obligations
_____ / 7. Loss is reasonably possible and can be reasonably estimated. / g. Current portion of long-term debt
_____ / 8. Loss is probable and can be reasonably estimated. / h. Disclosure of a contingent liability
_____ / 9. Gift cards. / i. Interest expense
_____ / 10. Social Security and Medicare. / j. Commercial paper
Record notes payable and notes receivable
(LO8-2)
P8-2C Aerospace Engineering borrows $40 million cash on November 1, 2015. Aerospacesigns a six-month, 6% promissory note to First National Bank under a prearranged short-term line of credit. Interest on the note is payable at maturity. Each firm has a December 31 year end.
Required:
1. Prepare the journal entries on November 1, 2015to record (a) the notes payable for Aerospace Engineering and (b) the notes receivable for First National Bank.
2. Record the adjusting entries on December 31, 2015 for (a) Aerospace Engineering and (b) First National Bank.
3. Prepare the journal entries on April 30, 2016to record payment of (a) the notes payable for Aerospace Engineering and (b) the notes receivable for First National Bank.
Record payroll
(LO8-3)
P8-3C Assume payroll for Kicker Sound Systems for the month of January was $150,000 and the following withholdings, fringe benefits, and payroll taxes apply:Federal and state income taxes withheld / $38,000
Health insurance premiums (Blue Cross) paid by employer / 12,000
Contribution to retirement plan (Fidelity) paid by employer / 15,000
FICA tax rate (Social Security and Medicare) / 7.65%
Federal and state unemployment tax rate / 6.2%
Assume that Kicker has paid none of the withholdings or payroll taxes by the end of January (record them as payables) and that no employee’s cumulative wages exceed the relevant wage bases.
Required:
1. Record the employee salary expense, withholdings, and salaries payable.
2. Record the employer-provided fringe benefits.
3. Record the employer payroll taxes.
Record payroll
(LO8-3)
P8-4C Arrow Systems offers its employees free medical, dental, and life insurance coverage. It also matches employee contributionsto a voluntary retirement plan up to 6% of their salaries. Assume that no employee’s cumulative wages exceed the relevant wage bases. Payroll information for the bi-weekly payroll period ending January24th is listed below.
Wages and salaries $1,000,000
Employee contribution to voluntary retirement plan 60,000
Medical insurance premiums 25,000
Dental insurance premiums 6,000
Life insurance premiums 7,000
Federal and state income taxes to be withheld 205,000
FICA tax rate 7.65%
Federal and state unemployment tax rate 6.20%
Required:
1. Record the employee salary expense, withholdings, and salaries payable.
2. Record the employer-provided fringe benefits.
3. Record the employer payroll taxes.
Record unearned revenues (LO8-4)
P8-5C The University of Nebraska football stadium is the third largest city in the state of Nebraska on game days. The stadium has sold out every game since the late 1960’s. The seating capacity is about 80,000 fans. Assume the stadium sells out all six home games before the season begins, and the athletic department collects $38.4 million in ticket sales.
Required:
1. What is the average price per season ticket and average price per individual game ticket sold?
2.Record the advance collection of $38.4 million in ticket sales.
3.Record the revenue earned after the first home game is completed.
Record unearned revenues and sales taxes(LO8-4)
P8-6C During its first three months of operation, Palimino's sold gift cards in various amounts totaling $5,200. The gift cards are redeemable for meals within one year of the purchase date. Gift cards totaling $1,900 were presented for redemption during the first three months of operation prior to year end on December 31. The sales tax rate on restaurant sales is 7%, assessed at the time meals (not gift cards) are purchased. Palimino's will remit sales taxes in January.
Required:
1. Record (in summary form) the $5,200 in gift cards sold (keeping in mind that, in actuality, each sale of a gift card or a meal would be recorded individually).
2. Record the $1,900 in gift cards redeemed. The $1,900 includes a 7% sales tax of $124.30.
3. Determine the balance in the unearned revenue account (remaining liability for gift certificates) to be reported on the December 31 balance sheet.
Record contingencies
(LO8-5)
P8-7C Leisure Luggage maintains a line of luggage designed for airline travel. Assume the following transactions occur during the year ended December 31, 2015.
Required:
Record any amounts as a result of each of these contingencies.
1. In November 2015, Leisure Luggage became aware of a design flaw in one of its lines of luggage. A product recall is probable and is estimated to cost the company between $300,000 and $500,000.
2. Leisure Luggage is the defendant in a patent infringement lawsuit brought by a competitor. It appears reasonably possible Leisure Luggage will lose the case, and potential losses are estimated to be $1.2 million.
3. Credit sales were $12 million for 2015. Although no customer accounts have been shown to be uncollectible, the company estimates that 3% of credit sales will eventually prove uncollectible.
4. Leisure Luggage is the plaintiff in a lawsuit filed against a supplier. The suit is in final appeal, and attorneys advise it is virtually certain that Leisure Luggage will win and be awarded $800,000.
Record contingencies
(LO8-5)
P8-8C Washington County Airport (WCA) faces threepotential contingency situations, described below. Their fiscal year ends December 31, 2015.
Required:
Determine the appropriate means of reporting each situation for the year ended December 31, 2015 and record any necessary entries. Explain your reasoning.
1. WCA is suing a national airline. WCA’s lawyers confirm that it is probable WCA will be awarded damages of $500,000 in the case.
2. In June, 2015 a worker was injured in an accident and has sued the company for $200,000. Legal counsel believes it is reasonably possible, but not probable, that the outcome of the suit will be unfavorable, and that the settlement would cost the company from $100,000 to $200,000.
3. A suit for $1.5 million was filed by an airline on November3, 2015. Legal counsel believes an unfavorable outcome is probable. A reasonable estimate of the award payment to the airline is between $500,000 and $1 million. No amount within this range is a better estimate of potential damages than any other amount.
Calculate and analyze ratios
(LO8-6)
P8-9C Selected financial data regarding two competing airlines are provided as follows:
($ in millions) / Company A / Company BCurrent assets
Cash and cash equivalents / $1,225 / $4,684
Short-term investments / 3,104 / 1,351
Net receivables / 811 / 1,844
Inventory / 525 / 388
Other current assets / 270 / 637
Total current assets / $5,935 / $8,904
Current liabilities
Accounts payable / $6,702 / $6,991
Short-term debt / 2,672 / 2,407
Other current liabilities / 1,624
Total current liabilities / $9,374 / $11,022
Required:
1. Calculate the current ratio for both companies. Which airline has the best current ratio?
2. Calculate the acid-test (quick) ratio for both companies. Which airline has the best acid-test ratio?
3. How would the purchase of additional inventory by issuing short-term debt affect the current ratio? How would it affect the acid-test ratio?
Financial Accounting, 3e1The McGraw-Hill Companies, Inc., 2014