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Exam 9: Reporting and Interpreting Liabilities

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Question 51

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Alden Trucking Company is replacing part of their fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2014. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2014 and continuing for a total of four more years (final payment December 31, 2018) . Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. How much is the 2015 interest expense?

A) $3,169,880.
B) $3,290,800.
C) $4,000,000.
D) $2,790,800.

E) B) and D)
F) B) and C)

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Question 52

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SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable. • Collected cash for services to be provided within the next six months. • The reclassification of short-term debt to long-term debt. Which of the above transactions resulted in a decrease in working capital?

A) The accrual of interest expense.
B) Collecting cash for services to be provided in the future.
C) The reclassification of short-term debt to long-term debt.
D) Both the accrual of interest expense and the reclassification of short-term debt to long-term debt.

E) C) and D)
F) B) and D)

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Question 53

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Straight Industries purchased a large piece of equipment from Curvy Company on January 1, 2014. Straight Industries signed a note, agreeing to pay Curvy Company $400,000 for the equipment on December 31, 2016. The market rate of interest for similar notes was 8%. The present value of $400,000 discounted at 8% for three years is $317,520. On January 1, 2014, Straight recorded the purchase with a debit to equipment for $317,520 and a credit to notes payable for $317,520. On Straight Industries' balance sheet for the year ended December 31, 2014, the book value of the liability for notes payable, including accrued interest would be closest to:

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date. The first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. The liability reported at on the balance sheet as of the purchase date, after the initial $90,000 payment was made, is closest to:

Smith Corporation entered into the following transactions: • Purchased inventory on account. • Collected an account receivable. • Purchased equipment using cash. Which of the above transactions resulted in an increase in working capital?

The choice of inventory method has an impact on the accounts payable turnover ratio.

The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to suppliers.

The following data is available for Tommy's Toys for the years 2012 through 2015: $\begin{array}{lllrr}&2015&2014&2013&2012\\\text { Cost of goods sold } & \$ 7,506 & \$ 7,646 & \$ 7,799 & \$ 7,815 \\\text { Accounts payable } & \$ 1,240 & \$ 1,022 & \$ 878 & \$ 896\end{array}$ A. Calculate the accounts payable turnover ratio for the following years: 1. $\quad$ 2015 2. $\quad$ 2014 3. $\quad$ 2013 B. Calculate the number of days it is taking Tommy's Toys to pay its vendors (assume a 365-day year): 1. $\quad$ 2015 2. $\quad$ 2014 3. $\quad$ 2013 C. Explain whether Tommy's Toys is doing a better job over the years of paying its vendors in a timely manner.

Why are present value concepts and applications so important when companies purchase equipment financed by the seller?

Working capital is a measure of long-term liquidity and is calculated by subtracting the current liabilities from the current assets.

Cash received from customers may result in a current liability.

Phipps Company borrowed $25,000 cash on October 1, 2014, and signed a nine-month, 8% interest-bearing note payable with interest payable at maturity. The amount of interest expense to be reported during 2015 is which of the following?

For the present value of a single amount, the compounding period may only be once a year.

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The equipment reported on the balance sheet as of the purchase date is closest to:

Your goal is to be able to withdraw $5,000 for each of the next ten years beginning one year from today. The return on the investment is expected to be 12%. The amount that needs to be invested today is closest to:

The accrual of interest on a short-term note payable decreases working capital and current assets.

Purdum Farms borrowed $10 million by signing a five-year note on December 31, 2013. Repayments of the principal are payable annually in installments of $2 million each. Purdum Farms makes the first payment on December 31, 2014 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities, respectively, in connection with the note at December 31, 2014, after the first payment is made?

Information Company purchased an asset that cost $70,000 on January 1, 2014. Arrangements were made with the supplier to pay $10,000 cash on January 1, 2014, and the balance was to be paid over a three-year period, with equal annual payments of $24,553 to be made at the end of 2014, 2015, and 2016. Each payment will include principal plus interest on the unpaid balance at 11% per year. Requirements: B. Prepare the journal entry for the payment on December 31, 2015. C. Explain the change, over time, on the amount of interest and the balance of the debt principal.

Which of the following describes an accrued liability?

Your goal is to be able to withdraw $10,000 for each of the next nine years beginning one year from today and also to withdraw $50,000 ten years from today. The return on the investment is expected to be 6%. The amount that needs to be invested today is closest to: