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Exam 7: Accounting for Liabilities

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Question 91

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Wiggins Company issued a $66,000, 8% note payable, with a one-year term on September 1, Year 1. What amount of interest expense will be recognized on the income statement for Year 1? What amount of interest expense will be recognized on the income statement for Year 2?

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Interest expense for Year 1 = ...

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Question 92

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Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAJoseph Company issued a one-year, 6% note to Community Bank.

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Issuing a note payable in...

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Question 93

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Benitez Company had sales of $800,000 in Year 1. The company expects to incur warranty expenses amounting to 3% of sales. There were $13,000 of warranty obligations paid in cash during Year 1. Based on this information:

Riley Company borrowed $18,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 6% annual interest rate. Riley earned cash revenue of $840 in Year 1 and $600 in Year 2. Assume no other transactions.The amount of total liabilities that would appear on Riley's December 31 balance sheets for Year 1 and Year 2, respectively, would be:

Marvin Company issues $125,000 of bonds at face value on January 1. The bonds carry a 6% 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?

Monthly remittance of sales tax due has no impact on the income statement, but reduces cash flow from operating activities.

Currie Company borrowed $20,000 from the Sierra Bank by issuing a 10% three-year note. Currie agreed to repay the principal and interest by making annual payments in the amount of $8,042. Based on this information, the amount of the interest expense associated with the second payment would be: (Round your answer to the nearest dollar.)

At the end of Year 1, Durango Company recognized its obligation under product warranties. During Year 2, it replaced products to its customers under the terms of the warranties. The Year 2 warranty settlements should be recorded as asset use transactions.

Wayne Company issued bonds with a face value of $600,000, a 6% stated rate of interest, and a 10-year term. The bonds were issued on January 1, Year 1, and Wayne uses the straight-line method of amortization. Interest is paid annually on December 31.Assuming Wayne issued the bond for 102½, the amount of interest expense appearing on the Year 1 income statement would be:

In December Year 1, Lucas Corporation sold merchandise for $10,000 cash. Lucas estimated that $700 of warranty claims might be filed in regard to these sales. On February 12, Year 2, warranty work amounting to $550 was performed for one of the customers ($430 labor paid in cash and $120 from the materials inventory) .Which of the following answers correctly shows the effect of the recognition of the warranty obligation at the end of Year 1 on the financial statements of Lucas?

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

If a bond discount is amortized using the effective interest method, the total amount of interest recognized over the life of the bond is the same as if the straight-line method is used.

Stanton Company issued five-year 7% bonds with a face value of $100,000, for $96,567.94 on January 1, Year 1 when the market (effective) rate of interest was 7.5%. The bonds pay annual interest each December 31. Stanton uses the effective interest method for amortization of premium or discount on bonds payable. Round your answers to two decimal places. Required:What is the annual amount of cash that Stanton will pay to bondholders for interest?What amount of interest expense and discount amortization should Stanton recognize for Year 1? What is the carrying amount of the liability on December 31, Year 1?What amount of interest expense and premium amortization should Stanton recognize for Year 2? What is the carrying amount of the liability on December 31, Year 2?What is the total amount of interest that Stanton will record in interest expense over the life of the bond?

The Platte Corporation issues a 5-year note payable on January 1, Year 1 for $5,000. The interest rate is 5% and the annual payment of $1,156, due each December 31, includes both interest and principal.Which of the following answers correctly shows the effect of the issuance of the note on Platte's financial statements?

Indicate how each event affects the horizontal financial statements model. Use the following letters to record your answer in the box shown below. If an event increases one account and decreases another account equally within the same element, record I/D. If an event has no impact on the element, record NA. You do not need to enter amounts.Increase = I Decrease = D Not Affected = NAKelly Company sells goods to customers with a three-year warranty. During Year 1, Kelly sold $800,000 of goods. On December 31, Year 1, Kelly made the appropriate year-end adjustment to record the warranty expense related to the goods sold during the year. During Year 2, Kelly paid $4,000 cash to satisfy warranty claims. Show the effects of the Year 2 cash payments to satisfy warranty claims.

All lawsuits in which a company has been named a defendant should be either disclosed in the company's notes to the financial statements, or recognized as a liability on its balance sheet.

Jones Company issued bonds with a $200,000 face value on January 1, Year 1. The five-year term bonds were issued at 97 and had a 7½% stated rate of interest that is payable in cash on December 31^st of each year. Jones amortizes the bond discount using the straight-line method. Based on this information:The amount of interest expense shown on Jones's December 31, Year 1 income statement would be:

On January 1, Year 1, the Mahoney Company borrowed $324,000 cash from Sun Bank by issuing a five-year 8% term note. The principal and interest are repaid by making annual payments beginning on December 31, Year 1. The annual payment on the loan based on the present value of annuity factor would be $81,150.Which choice reflects the financial statement effects of the cash payment on December 31, Year 1?

Niagara begins its loan transactions with Centennial Bank by borrowing $2,000 on January 1, Year 1. On January 1, Year 1, the Niagara Corporation arranges a $6,000 line of credit with the Centennial Bank. It accepted the bank's offer of 1% above the prime rate with interest payments on December 31 of each year. All borrowings and repayments are to take place on January 1 of each year.Niagara records the first year's interest payment on December 31, Year 1. Centennial's prime rate is 4% for Year 1. Which of the following answers shows the effect of this event on the financial statements?

Riley Company borrowed $36,000 on April 1, Year 1 from the Titan Bank. The note issued by Riley carried a one year term and a 7% annual interest rate. Riley earned cash revenue of $1,700 in Year 1 and $1,400 in Year 2. Assume no other transactions.The amount of cash flow from operating activities that would appear on the Year 2 statement of cash flows would be: