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Exam 8: Current and Contingent Liabilities

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Question 1

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General Lighting During the first quarter of 2012,the company sold 4,000 batteries on credit for $150 each plus state sales tax of 6%. -Refer to General Lighting.The $150 price of each battery includes a $3 federal excise tax.Which of the following statements is true regarding the proper accounting treatment for the taxes related to this transaction?

A) They are recorded as additions to revenue.
B) They are recorded as unearned revenues on the company's balance sheet.
C) They are recorded as a current liability owed to the taxing authority.
D) They are recorded as expenses in the same period as the corresponding sales revenue.

E) None of the above
F) A) and B)

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Question 2

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Employers withhold taxes from their employees' gross pay and later pay these amounts withheld to the taxing authority.

A) True
B) False

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Question 3

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A(n)____________________ usually guarantees the repair or replacement of defective goods during a period ranging from a few days to several years following the sale.

When a company sells goods or provides services for a customer but the customer intends to pay later,the company must record a current liability.

Glass Doctor Selected information from the firm's consolidated balance sheet is provided below.Assume that all of the account balances on the balance sheet are normal balances. $\begin{array}{|l|l|l|}\hline \text { Glass Doctor }\\\hline \text { Selected Information from the Consolidated Balance Sheet (in millions) }\\\hline \text { Assets(in ahphabtical orver): } & \text { Dec. 31, 2014 } & \text { Dec. 31, 2013 } \\\hline \text { Accounts receivable } & \$ 214.2 & \$ 124.9 \\\hline \text { Cash and cash equivalents } & 100.0 & 99.5 \\\hline \text { Inventories } & 72.1 & 75.6 \\\hline \text { Marketable securities } & 44.7 & 40.3 \\\hline \text { Other current assets } & 10.8 & 12.0 \\\hline \text { Property, plant and equipment } & 5,006.6 & 5,001.2 \\\hline\\\hline \text { Liabilities(in ahplabetical order): }\\\hline \text { Accounts payable and accrued expenses } & 14.4 & 15.4 \\\hline \text { Current portion of longterm debt } & 44.6 & 31.5 \\\hline \text { Income taxes payable } & 30.8 & 35.3 \\\hline \text { Longterm debt } & 350.0 & 246.8 \\\hline \text { Longterm income taxes payable } & 29.9 & 31.7 \\\hline \text { Notes payable due in } 8 \text { months } & 101.0 & 105.4 \\\hline \text { Other long-term liabilities } & 12.5 & 16.9 \\\hline\end{array}$ -Refer to the partial balance sheet presented above for Glass Doctor.Compute the following liquidity ratios for 2014 and 2013: Curent Ratio Quick Ratio Cash Ratio Operating Cash Flow Ratic Assume that Glass Doctor's statement of cash flows presented cash flows from operating activities of $204.6 million and $201.1 million for the years ended December 31,2014 and 2015,respectively.Comment on the direction and significance of the change in the ratios from 2013 to 2014.

Assume that a company has a cash ratio of .45.Recording the estimated warranties expense on the period's sales would cause the cash ratio to

The total amount of interest that will be paid on a 5-year,$90,000 note payable at 11% simple annual interest is?

Accounts payable represent amounts owed to outside suppliers of goods and services;whereas ____________________ reflect amounts owed in which a formal agreement or contract has been signed.

Interest on a note payable can be calculated by multiplying the amount owed by the interest rate by the fraction of year that represents the time elapsed since borrowing.

What type of entry is made to create a credit balance in the Estimated Warranty Liability account on the balance sheet? What account would be debited in this entry?

The cash ratio is calculated by dividing cash flows from operating activities by current liabilities.

On April 1,2012,Guyton Sails accepted a $12,000 advance payment for maintaining a customer's fleet of sail boats.The contract is for a twelve month period.In May 2012,the company performed $1,200 worth of repairs.What is the remaining liability that would appear on the company's balance sheet at the end of May?

The proceeds from advance ticket sales for a concert to be held next month should be recorded as a current liability.

____________________ are commitments that represent probable future sacrifices of economic benefits.

A flour mill orders grain sacks from a local farmer.When the company places an order for grain on account,the corresponding journal entry includes a debit to Supplies and a credit to ____________________.

A current liability is defined as a commitment or obligation which requires a company to transfer assets,create a new current liability,or provide services to another entity at some point in the future that must occur

When a company estimates the amount of expected warranty expenses to be incurred in the future pertaining to past product sales,the account to be credited is called the ____________________.

"You Decide" Essay You are the owner and operator of a growing small business.You would like to expand your product offerings but need $25,000 in short-term financing in order to do so.You have an appointment to see your banker tomorrow.The banker has asked you to bring certain financial information with you to the meeting.That information is provided below: $\begin{array}{|l|l|l|l|l|}\hline \text { at December } 31 \text {, }\\\hline 2013&2012\\\hline \text { Balance Sheet Information } & & & & \\\hline \text { Total current assets } & & \$ 66,000 & & \$ 75,000 \\\hline \text { Accounts payable } & & 2,610 && 1,500 \\\hline \text { Short-term notes payable } & & 12,010 & & 8,885 \\\hline \text { Income taxes payable } & 380 & & 560 & \\\hline \text { Income Statement Information } & & & & \\\hline \text { Sales } & & \$ 842,000 & & \$ 765,000 \\\hline \text { Net income } & & 10,275 & & 4,670\\\hline\end{array}$ Use your financial information to make a case for the loan.

A contingent liability must be recorded if it is reasonably possible and the amount can be reasonably estimated.

A company has cash of $800,current liabilities of $500,and long-term liabilities of $600.If the cash ratio is 2.5,then marketable securities must be