Sample Midterm Exam 2 SOLUTIONS

# B the contingent liability is reasonably possible and

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B. The contingent liability is reasonably possible and the amount is reasonably estimable within a range; however, because the loss is not probable, no journal entry for a loss and liability is required. WCA must disclose a description of the contingency in the notes to the financial statements. C. The contingent liability is probable and reasonably estimable, so it must be reported. Because the estimate of the loss is a range where no amount within the range is a better estimate than any other amount, the minimum amount of the range will be recorded as follows: Loss 500,000 Contingent Liability 500,000 The range of the potential loss (from \$500,000 to \$1 M) should also be disclosed.

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6. Selected financial data regarding two competing airlines are provided as follows: (\$ in millions) Company A Company B Current assets Cash and cash equivalents \$1,225 \$4,684 Short-term investments 3,104 1,351 Net receivables 811 1,844 Inventory 525 388 Other current assets 270 637 Total current assets \$5,935 \$8,904 Current liabilities Accounts payable \$6,702 \$6,991 Short-term debt 2,672 2,407 Other current liabilities 1,624 Total current liabilities \$9,374 \$11,022 Calculate the current ratio for both companies. Which airline has the best current ratio? (\$ in millions) Total Current Assets ÷ Total Current Liabilities = Current Ratio Company A \$5,935 ÷ \$9,374 = 0.63 Company B \$8,904 ÷ \$11,022 = 0.81 Company B (0.81) has the best current ratio.