Ch_09

Ch_09 - CHAPTER 9 LIABILITIES: INTRODUCTION Questions,...

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9-1 Solutions CHAPTER 9 LIABILITIES: INTRODUCTION Questions, Short Exercises, Exercises, Problems, and Cases: Answers and Solutions 9.1 See the text or the glossary at the end of the book. 9.2 a. Yes; amount of accrued interest payable. b. Yes. In spite of the indefiniteness of the time of delivery of the goods or services and the amount, the balance sheet reports a liability in the amount of the cash received. c. No; accounting does not record executory promises. d. Yes; at the present value, calculated using the yield rate at the time of issue, of the remaining coupon and principal payments. e. Yes; at the expected, undiscounted value of future service costs arising from all sales made prior to the balance sheet date. The income statement includes warranty expense because of a desire to match all expenses of a sale with the sale; presumably, one reason the firm sold the product was the promise of free repairs. When recognizing the expense, the accountant credits a liability account to recognize the need for the future expenditures. f. No. If the firm expected to lose a reasonably estimable amount in the suit, then it would show an estimated liability. g. Yes, assuming statutes or contracts require the restoration. The present value of an estimate of the costs is the theoretically correct answer, but many accountants would use the full amount undiscounted. h. No; viewed as executory. i. Airlines recognize an expense and a liability for the estimated costs of providing the free flight during the periods when customers use flight services at regular fares. The airlines accrue either the incremental cost of the free flight, which is a relatively small amount, or a portion of the average cost of a flight. The incremental cost is small because customers use otherwise unused capacity.
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Solutions 9-2 9.3 The expected value of the liability is $90,000 in both cases (.90 X $100,000 = $90,000; .09 X $1 X 1,000,000 = $90,000). Accounting would probably report the liability from the lawsuit as $100,000 and the liability for the coupons as $90,000. This inconsistency seems curious since the two situations differ only with respect to the number of possible outcomes (that is, all or nothing with respect to the lawsuit, whereas the coupon redemption rate conceivably ranges from one to one million). 9.4 Suppliers often grant a discount if customers pay within a certain number of days after the invoice date, in which case this source of funds has an explicit interest cost. Suppliers who do not offer discounts for prompt payment often include an implicit interest change in the selling price of the product. Customers in this second category should delay payment as long as possible because they are paying for the use of the funds. Firms should not delay payment to such an extent that it hurts their credit rating and raises their cost of financing.
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This note was uploaded on 04/23/2010 for the course B 101 taught by Professor Mcafee during the Winter '10 term at UMBC.

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Ch_09 - CHAPTER 9 LIABILITIES: INTRODUCTION Questions,...

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