Liabilities and Shareholders’ Equity
(120 points; 3 points each)
Calculations and explanations:
(Computed intermediate numbers are underlined and the final
answer is in bold.)
Four months of interest on this seven-month note payable will relate to the current
year and three months will relate to the year the note is paid. $56,000 x .09 x 3/12
interest expense in the year the note is paid.
This is the typical reporting of a long-term liability and its accrued interest. Principal
payable on August 31, 2007 is a long-term liability and interest payable on August 31,
2006 is a current liability (the interest payable on August 31, 2007 will not be accrued
until December 31, 2006).
is management’s estimate and the loss is probable so the liability is a
contingent liability and it is recorded.
On December 31, 2005, the firm will pay $1,000 in interest (10% x $10,000 x 12/12)
and 1/10 x $10,000
$1,000 of the principal
(reducing the Note Payable).
For proper accrual accounting, the warranty expense would be recognized when the
cars are sold and an Estimated Warranty Liability is established, so e. is the best answer.
Later, when the cars are repaired, the debit would be made to this liability account.
Using the present value factors for 7% for 20 periods: [($300,000 principal x .2584 =
$77,520) + ($15,000 interest x 10.5940 = $158,910)] =
total cash received.
$900,000 cash interest payment + $143,000 of discount amortized = $1,043,000 of
interest expense; $1,043,000 interest expense =
$14,900,000 carrying amount of the
bonds x the market interest rate x time (6/12);
therefore, the market interest rate =
Using the present value factors for 6% for 15 periods: [($1,000,000 principal x .4173
= $417,300) + ($70,000 interest x 9.7123 = $679,861)] = $1,097,161 cash received. This
is the carrying amount of the bonds for the first interest date, so we have: $1,097,161 x
interest expense at the first interest date.
Because the bonds
were dated January 1 but were issued on June 1, there is 5 months
of accrued interest included.
$200,000 x .09 x 5/12 = $7,500
of accrued interest included
in the cash received; $209,500
$7,500 = $202,000; so, there was a
(and this agrees with the fact that the bonds were sold to yield less than 9%).