Chapter 10 - Sol. of assigned problems

Chapter 10 - Sol. of assigned problems - Chapter 10...

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Chapter 10 Reporting and Interpreting Liabilities MULTIPLE CHOICE QUESTIONS 1. c; 2. e; 3. d; 4. c; 5. c; 6. b; 7. c; 8. d; 9. c; 10. d. E10–1 Req. 1 Total assets ($170,100 + $575,000). .......................................................... $745,100 Total liabilities ($28,000 + $60,000 + $12,000 + $3,000 + $4,000 + $110,000 + $7,800 + $2,000 + $10,000 + $400). ................................ (237,200) Total shareholders’ equity. .......................................................................... $507,900 Req. 2 (a) Current assets. ................................................................ $170,100 Current liabilities: Accounts payable. ....................................................... $60,000 Income taxes payable. ................................................. 12,000 Liability for withholding taxes. ...................................... 3,000 Rent revenue collected in advance. ............................ 4,000 Wages payable. ........................................................... 7,800 Property taxes payable. ............................................... 2,000 Note payable, 10% (due in 6 months). ........................ 10,000 Interest payable. .......................................................... 400 (99,200) Working capital. ............................................................... $ 70,900 (b) Current ratio = ($170,100 ÷ $99,200) = 1.71 . Working capital is critical for the efficient operation of a business. Current assets include cash and assets that will be collected in cash within one year or the normal operating cycle of the company. A business with insufficient working capital may not be able to pay its short-term creditors on a timely basis and could, eventually, result in bankruptcy.
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The current ratio is a measure of liquidity. It helps analysts assess a company’s ability to meet its short-term obligations as they generally come due. Req. 3 Interest expense for 2006 = $28,000 x 9% x 3/12 = $630 E10–3 (Amounts in thousands) Date Assets Liabilities Shareholder’s Equity Nov. 1, 2005 Cash + $4,500 Note Payable + $4,500 Not Affected Dec. 31, 2005 Not Affected Interest Payable + $75 Interest Expense – $75 April 30, 2006 Cash – $4,725 Note Payable – $4,500 Interest Payable – $75 Interest Expense – $150 E10–7 Req. 1 Date Assets Liabilities Shareholders’ Equity Jan. 10, 2006 Purchases + $18,000 Accounts Payable + $18,000 Not Affected* March 1, 2006 Cash + $50,000 Note Payable + $50,000 Not Affected April 5, 2006 Accounts Receivable + $34,500 GST Payable + $2,100 PST Payable + $2,400 Revenues + $30,000 * The purchases are counted as inventory at that date, and do not affect equity. Req. 2 August 31, 2006 Cash paid: $52,000 ($50,000 + ($50,000 x 8% x 6/12))
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Req. 3 Transactions (a) and (c) have no impact on cash flows because there is neither an inflow nor an outflow of cash. Transaction (b) results in an inflow of cash from borrowing, which is a financing activity. The August 31 payment is an outflow of cash.
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Chapter 10 - Sol. of assigned problems - Chapter 10...

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