Chapter 7 Accounting for Liabilities

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University of Colorado, Denver *

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Accounting

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Feb 20, 2024

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Chapter 7 Accounting for Liabilities TB MC Qu. 7-51 (Algo) West Company borrowed... West Company borrowed $60,000 on September 1, Year 1 from the Valley Bank. West agreed to pay interest annually at the rate of 6% per year. The note issued by West carried an 18-month term. Based on this information the amount of interest expense appearing on West's Year 1income statement would be: QO so. O s360. QO s900. @ @ s1.200. $60,000 x 6% x 4/12 months = $1,200 interest expense. The fact that it was an 18-month note does not affect the Year 1interest expense. TB MC Qu. 7-53 (Algo) Madison Company issued an interest-bearing... Madison Company issued an interest-bearing note payable with a face amount of $9,000 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be: QO 39420 © @ $9:300 QO s9720 QO s$9000 $9,000 x 8% x 5/12 = $300 interest payable; $9,000 notes payable + $300 interest payable = $9,300 total liabilities. TB MC Qu. 7-59 (Static) On November 1, Year 1 Claire... On November 1, Year 1 Claire Company borrowed $5,000 cash from Shelter Company. The one-year note carried a 5% rate of interest. Which of the following shows how the loan will affect Claire’s financial statements on November 1, Year 1? Balance Sheet Income Statement Assets = Liabilities < Stockholders' Equity Revenue = Expense = Net Income Statement of Cash Flows A 5,000 n/a 5,000 5,000 n/a 5,000 5,000 FA B. 5,000 n/a 5,000 5,000 n/a 5,000 5,000 IA C (5,000) (5,000) n/a n/a n/a n/a (5,000) 1A D. 5,000 5,000 n/a n/a n/a n/a 5,000 FA O choice A QO choice B QO choice © @ @ choice D The event is an asset source event. The asset account (cash) increases and the liability account (notes payable) increases. In other words, liabilities would be identified as the source of the cash. Since no interest has been incurred, there is no impact on the income statement. The cash inflow is a financing activity.

Chapter 7 Accounting for Liabilities TB MC Qu. 7-60 (Static) On August 1, Year 1 Gin Company... On August 1, Year 1 Gin Company borrowed $50,000 cash. The one-year note carried a 6% rate of interest. Which of the following shows how the December 31, Year 1 recognition of accrued interest will affect Gin’s financial statements? Balance Sheet Income Statement Assets = Liabilities + Stockholders' Equity Revenue = Expense = Net Income Statement of Cash Flows A n/a . (1,250) n/a 1,250 (1,250) (1,250) FA B. n/a 1,250 (1,250) n/a 1,250 (1,250) n/a C. (1,750) (1,750) n/a n/a n/a n/a (1,750) 1A D. n/a 1,750 (1,750) n/a 1,750 (1,750) n/a QO choice A @ @ choiceB QO choicec QO Choice D The amount of interest expense is computed as follows: Total annual interest = $50,000 x 0.06 = $3,000 Monthly interest = $3,000 annual interest + 12 months = $250 Interest expense in Year 1= $250 per month x 5 months = $1,250 Recognizing the accrued interest expense increases expenses and liabilities (interest payable). The increase in expense decreases net income and ultimately stockholders’ equity (retained earnings). Accrued interest means that the company has incurred the interest expense but has not paid cash. Since no cash was paid, cash flow is not affected. TB MC Qu. 7-72 (Static) Burger Barn has been named as a... Burger Barn has been named as a plaintiff in a $5 million lawsuit filed by a customer over the addictive nature of the company's french fries. Burger Barn's attorneys have advised them that the likelihood of a future obligation from the suit is remote. As a result of the lawsuit, Burger Barn should: O Disclose the lawsuit in the notes to the financial statements. O Recognize a $5 million liability on its balance sheet for the contingency. -> O Ignore the lawsuit in its financial statements. 8 . Settle with the customer immediately for $5 million to avoid harmful publicity. Because the obligation is considered remote, it is neither recognized nor disclosed in Burger Barn's financial statements. TB MC Qu. 7-79 (Static) On a classified balance sheet,... On a classified balance sheet, the financial statement user will be able to distinguish between: O cash flow from operations and cash flow from investing activities. 0 . current and noncurrent assets. O product and period costs. O none of these answer choices are correct. The classified balance sheet also distinguishes between current and noncurrent (long term) liabilities. TB MC Qu. 7-80 (Static) Which of the following items would... Which of the following items would typically appear in the current liabilities section of a classified balance sheet? O Interest payable O Salaries payable o Accounts payable 0 . All of these answer choices are correct. Current (short-term) liabilities would be those due within one year or an operating cycle, whichever is longer. An operating cycle is defined as the average time it takes a business to convert cash to inventory, inventory to accounts receivable, and accounts receivable back to cash. Accounts payable, interest payable, and salaries payable are typically current liabilities.

Chapter 7 Accounting for Liabilities TB MC Qu. 7-82 (Static) Regardless of the specific type of... Regardless of the specific type of long-term debt, which of the following is normally required with debt transactions? O to repay the debt O to pay dividends O to pay interest G . to repay the interest and repay the debt When a company issues debt, whether notes or bonds, the company is hormally expected to repay the debt, as well as to pay interest to the lender. TB MC Qu. 7-95 (Static) Bonds payable are usually classified... Bonds payable are usually classified on the balance sheet as: O current liabilities. O . long-term liabilities. O investments and funds. O other assets. Bonds will not be repaid until many accounting periods from the issue date. Therefore, they are classified as long-term liabilities. TB TF Qu. 7-132 (Static) Indicate whether each of the following is... Indicate whether each of the following is true or false. Perez Company borrowed money from its bank in July Year 1. The accrual of interest on the loan at the end of Year 1: = = a) reduces cash flows. False @ b) involves recognition of interest Tie @ expense. c) does not affect income for Year 1. False @ d) involves recognition of a liability. Tue @& e) records a cash payment for interest. False @ TB TF Qu. 7-138 (Static) On January 1, Year 1, Carlyle Corporation... On January 1, Year 1, Carlyle Corporation issued a five-year term note. The note requires an annual cash payment on December 31 of each year. The payment includes a principal reduction and interest. Indicate whether each of the following statements is true or false. m - a) The issuance of the note will increase assets and liabilities. True @ b) The first payment on the note will reduce liabilities and assets, but will not affect stockholders’ equity. False @ c) The second payment on the note will include higher interest expense than did the first payment. False Q d) Each payment on the note includes a cash flow from operating activities and a cash flow from financing activities. True Q e) The amount of reduction in liabilities will increase with each succeeding payment. True ° TB MC Qu. 7-81 (Static) Which of the following correctly... Which of the following correctly describes an installment note? O An installment note requires equal interest payments with the entire principal balance paid at maturity. o . An installment note requires equal payments of interest and principal in which the amount of interest decreases over the life of the note. O An installment note requires equal payments of interest and principal in which the amount of interest increases over the life of the note. O The installment note requires decreasing payments of interest and principal in which the amount of interest remains constant over the life of the note. As the principal balance of the note decreases over time the portion of the payment that is applied to interest expense decreases. However, the amount of the payment remains constant.

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