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Exam 9: Reporting and Interpreting Liabilities

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Question 21

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Melanie Corp. borrowed $100,000 cash on September 1, 2014, and signed a one-year 6%, interest-bearing note payable. The interest and principal are both due on August 31, 2015. Assume that the appropriate adjusting entry was made on December 31, 2014 and that no adjusting entries have been made during 2015. Which of the following would be the required journal entry to pay the note on August 31, 2015?

A) Option A
B) Option B
C) Option C
D) Option D

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Question 22

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Houston Company is involved in a lawsuit. In which of the following situations is only a note disclosure of the contingent liability reported within the financial statements?

A) When the loss is remote and the amount cannot be reasonably estimated.
B) When the loss is probable and the amount can be reasonably estimated.
C) When the loss is reasonably possible and the amount can be reasonably estimated.
D) When the loss is remote and the amount can be reasonably estimateD.A contingent liability that is reasonably possible and can reasonably be estimated is disclosed in the notes to the financial statements.

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Question 23

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Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the purchase date, and agreeing to make annual payments for the next ten years. The first payment is due one year after the purchase date. Rudy's incremental borrowing rate is 10%. Each of the annual payments is closest to:

On January 1, 2014, Mission Company agreed to buy some equipment from Anna Company. Mission Company signed a note, agreeing to pay Anna Company the entire $500,000 for the equipment on December 31, 2016. The market rate of interest for this note was 10%. Required: (Round all answers to whole dollar amounts.) A. Prepare the journal entry Mission Company would record on January 1, 2014 related to this purchase. B. Prepare the December 31, 2014, adjusting entry to record interest expense related to the note for the first year. Assume that no adjusting entries have been made during the year. C. Prepare the December 31, 2015, adjusting entry to record interest expense related to the note for the second year. Assume that no adjusting entries have been made during the year. D. Prepare the entry Mission Company would record on December 31, 2016, the due date of the note to record interest expense for the third year and payment of the note. Assume that no adjusting entries have been made during the year. Round the interest expense to an amount that will increase notes payable to the correct final payoff amount.

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. The land reported on the balance sheet is closest to:

A contingent liability cannot be disclosed in a note to the financial statements unless it can be estimated.

Which of the following would not be a result of the adjusting entry to record accrued interest on a note payable?

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 following statements is correct with respect to determining the net cash flow from operating activities on a statement of cash flows?

When a company receives cash before providing any products or services are provided the following results:

Working capital decreases when accrued wages expense is recorded at year-end.

A company borrowed $100,000 at 6% interest on September 1, 2014. Assuming adjusting entries have not been made during the year, the entry to record interest accrued on December 31, 2014 would include a debit to interest expense and a credit to interest payable for $2,000.

Huck Corporation is looking to purchase a truck costing $49,000 by agreeing to make payments every three months for the next two years. The first payment is due three months after the purchase date. Huck's incremental borrowing rate is 8%. Each of the payments is closest to:

A contingent liability is disclosed in a note to the financial statements when the liability is reasonably possible and can be estimated.

A company's 2014 income tax return reported a $75,000 tax liability. During 2014, the deferred income tax liability account increased $9,000. Which of the following statements is correct?

Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every three months for the next five years. The first payment is due three months after the purchase date. Husky's incremental borrowing rate is 12%. Each of the payments is closest to:

Which of the following best describes the accrual of interest?

Wages expense is an example of an accrued liability account.

Operating leases are reported on the balance sheet at an amount equal to the present value of the future cash flows.

A liability that is estimated because the final settlement amount is unknown cannot be reported on the balance sheet.

Sharp Company borrowed $500,000 on a 6% one-year, interest-bearing note dated November 1, 2014 with interest payable at maturity. The annual accounting period ends on December 31. Assume that adjusting entries are only made at December 31, the company's fiscal year-end. Required: Prepare journal entries for each of the following dates: A. November 1, 2014. B. December 31, 2014. C. October 31, 2015.