ACTG 211 Lecture Notes - Lecture 8: Financial Statement, Matching Principle, Contingent Liability

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30 May 2018

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Accounting 211 – Lecture 8 – Reporting and Analyzing

Current Liabilities

Defining Liabilities

• The company has a present obligation

• There can be some for future sacrifices

• There can be some because of a past event

Classifying Liabilities

• Current Liabilities

o Expected to be paid within one year or the company’s operating cycle, whichever

is longer

• Long-term Liabilities

o Expected not to be paid within one year or the company’s operating cycle,

whichever is longer

Uncertainty in Liabilities

• Uncertainty in whom to pay

• Uncertainty in when to pay

• Uncertainty in how much to pay

Known Liabilities

• Accounts payable

• Sales taxes payable

• Unearned revenues

• Short-term notes payable

• Payroll liabilities

• Multi-period known liabilities

Sales Taxes Payable

- On May 15, 2013, Max Hardware sold building materials for $7500 that are subject to a

6% sales tax

o Cash 7950

▪ Sales 7500

▪ Sales Taxes Payable 450

Unearned Revenue

- On May 1, 2013, A-1 Catering received $3000 in advance for catering a wedding party to

take place on July 12, 2013

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Document Summary

Accounting 211 lecture 8 reporting and analyzing. Defining liabilities: the company has a present obligation, there can be some for future sacrifices, there can be some because of a past event. Classifying liabilities: current liabilities, expected to be paid within one year or the company"s operating cycle, whichever is longer, long-term liabilities, expected not to be paid within one year or the company"s operating cycle, whichever is longer. Uncertainty in liabilities: uncertainty in whom to pay, uncertainty in when to pay, uncertainty in how much to pay. Known liabilities: accounts payable, sales taxes payable, unearned revenues, short-term notes payable, payroll liabilities, multi-period known liabilities. On may 15, 2013, max hardware sold building materials for that are subject to a. On may 1, 2013, a-1 catering received in advance for catering a wedding party to take place on july 12, 2013. 3000: unearned revenue, unearned revenue 3000, revenue catering 3000.

Related Questions

LuluCo reported the following on its 2014 income statement. Using the income statement and the balance sheet given below, prepare the statement of cash flows using the indirect method. Ignore required disclosures for cash flows associated with interest paid and received, dividends paid and received and income taxes as well as any non-cash disclosures that may have occurred in the current year.

Analysis of accounts:

1) Retired bonds, paid $11,500

2) Sold HTM investment in Lala Consulting common shares for $11,500

3) Purchased equipment $57,000 cash

4) Sold furniture, and settled in cash.

5) Purchased HFT investments $3,000 cash. This companyâs HFT investments are not readily convertible to a known amount of cash but will be traded within 12 months.

6) Paid cash dividends

7) Issued common shares, 2,300 shares at $5 per share.

8) Changes in other balance sheet accounts resulted from usual transactions and events

LuluCo
Income Statement
For the year ended December 31, 2014
Sales		$515,000
Operating expenses
Cost of goods sold	257,500
Depreciation expense	10,000
Interest expense	4,725
Amortization expense	19,000
Other operating expenses	97,600	388,825
Other revenues and expenses
Loss on sale of HTM investments		-1,000
Net income		$125,175


LuluCo
Balance Sheet
As of December 31, 2014	2014	2013
Cash	$16,000	$31,500
Investments (held for trading	61,000	58,000
Accounts receivable, net	72,500	89,000
Inventory	69,500	82,000
HTM investments	43,000	55,500
Property, plant, equipment, net	117,000	120,000
Patent, net	34,000	53,000
Total assets	$413,000	$489,000
Accounts payable	$68,500	$78,000
Salaries payable	53,500	43,000
Short-term notes payable	122,000	139,500
Bonds payable	83,000	94,500
Common shares	39,000	27,500
Retained earnings	47,000	106,500
Total liabilities and shareholders' equity	$413,000	$489,000

crimsonporpoise854

Ferntree Clothing Inc. is a company that makes and sellsclothing to upscale shops across the country. In 2005, the companydecided to add the sale of fabric to the company portfolio, sellingmainly to other clothing manufacturing companies. Ferntree soonrealized that this market was unprofitable with low margins andwith the continued increase in on-line sales ,their fabric divisionwas suffering.

The companyâs current controller vacated the position withoutnotice four months ago and Ferntree has hired you as their newcontroller to make any adjustments necessary and correct any errorsyou may find. The fiscal year end is January 31, 2017 and you willneed to correct errors, make adjustments and draft financialstatements using ASPE in preparation for the annual audit. Thefollowing information has been gathered for you to work with.

The trial balance at January 31, 2017, before any adjustments isprovided on the attached excel worksheet.

Your review through the company files has led you to thefollowing information, which may require adjustments:

1. In October of 2016, the shareholders met and decided to sellthe fabric division. By December 2016, it became apparent that abuyer is unlikely to be found. The only asset of this division isthe inventory, and all attempts have been made to sell this byyear-end. The company is expected to recover the book value of theinventory as it is being carried at its current fair value. Thereare no liabilities relating to this division. (Hint: Regardless ofa buyer, this would be classified as a gain/loss from discontinuedoperations).

2. The company paid a dividend of $25,000 to its shareholders inDecember 2016. This amount was incorrectly recorded as a cost ofgoods sold for the clothing division.

3. Last years accounts payable had been paid: $25,000 for theclothing division and $15,000 for the fabric division. When theywere paid, they had been debited to cost of goods sold for clothingdivision and operating expenses for the fabric division.

4. Upon reviewing the aged accounts receivable, it is apparentthat one account in the amount $5,000 had become uncollectible andwas written off to bad debt expense. In the past, 1% of accountsreceivable had been used to estimate the allowance for doubtfulaccounts, but this year given the past history, they have decidedto increase that amount to 2% of accounts receivable. All accountsreceivable and the allowance account relate to the clothingdivision.(Hint: adjust the bad debt expense and allowance accountfirst before you adjust for the allowance for doubtfulaccounts).

5. In January 2017, some old equipment was sold for proceeds of$250 cash. The original equipment cost $5,000 and had accumulateddepreciation of $4,900. The entry made when depositing the cash wasdebit Cash, credit equipment for $250. The equipment is beingamortized using the straight-line method over 10 years.Depreciation has not been recorded for the current year for theremainder of the equipment in this account.

6. FV-NI investments are long-term investments. The fair valueof the portfolio investments at January 31, 2017 was $35,000.

7. Insurance is paid each November 30th and covers a 12-monthperiod. When the company paid the insurance, it was debited toinsurance expense.

8. The note payable is due in two equal installments of $25,000each, plus interest on January 31, 2018 and 2019. The annualinterest rate is 5% and the note has been outstanding since August1, 2016.

9. Unpaid salaries and wages amounted to $1,500 at January 31,2017 and will be paid in the first payroll of February 2017. Thesehave not been recorded.

10. In reviewing sales, it was determined that the balance inthe unearned revenue account as at January 31, 2017 should be$30,000. The entire amount relates to the clothing division.

11. Ferntree has been making some income tax installments anddebiting these payments to the Income Taxes Payable account. It hasbeen determined that the applicable tax rate is 25%. The adjustingentry needed for taxes has not been recorded yet. (Hint: do thisentry last)

Required: a) Prepare all adjusting and correcting entries basedon the above information.

b) Post these entries journal entries to the trial balance andcomplete other columns of the work in good form

c) Prepare the January 31, 2017 Combined IncomeStatement/Comprehensive Income using the Multi-step incomestatement format, Statement of Financial Position and Statement ofRetained Earnings for Ferntree Clothing Inc. for the fiscal yearended January 31, 2017

Ferntree Clothing Inc.			January 31, 2017

	Unadjusted Trial Balance		Adjustments		Adjusted Trial Balance
Account	Debit	Credit	Debit	Credit	Debit	Credit
Petty Cash	500
Cash	63,250
Accounts Receivable	252,000
Allowance for doubtful accounts		7,500
Preapaid Insurance	5,000
Inventory- Clothing	400,000
Inventory- Fabric	150,000
FV-NI Investments	30,000
Equipment	499,750
Accum. Depreciation- Equipment		200,000
Goodwill	25,000
Accounts Payable		75,000
Salaries & wages Payable		0
Interest payable		0
Notes Payable		50,000
Unearned Revenue		20,000
Income tax payable	60,000
Common shares		75,000
Retained Earnings		588,000
Dividends	0
Sales Revenue- Clothing		2,000,000
Sales Revenue- Fabric		250,000
Unrealized Gain/loss- FV-NI		0
Gain/loss on disposal of equipment		0
Cost of Goods sold- Clothing	1,200,000
Cost of Goods sold- Fabric	275,000
Operating expenses-Fabric	100,000
Operating Expenses-Clothing:
Depreciation expense	0
Office expense	12,000
Travel expense	4,800
Insurace expense	7,200
Interest expense	1,200
Utilities expense	2,600
Rent expense	41,000
Salaries & wages expense	125,000
Supplies expense	500
Bad debt expense	5,000
Telephone & internet expense	4,200
Repairs & maintenance expense	1,500
Income tax expense	0
	3,265,500	3,265,500	0	0	0	0

viridianswan15

1. All of the following are characteristics of currentliabilities except:

a. they may involve estimated amounts. b. they are due withinone year or within the operating cycle, whichever is longer. c.they may be replaced with a new short-term liability rather thanbeing paid in cash. d. all three of the above are characteristic ofcurrent liabilities.

2. Which of the following is an example of a contingentliability?

a. A corporate long-term employment contract with the chiefexecutive officer. b. A lawsuit pending against a restaurant chainfor improper preparation of food. c. A liability for notes payablewith interest included in the face amount. d. The liability forfuture warranty repairs on computers sold during the currentperiod

. 3. A company will have to pay a $50,000 liability in 4 years.How much must be deposited now into a bank account earning 8%compounded semiannually to fully fund the future payment? HINT: PVof $1 The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $35,500 b. $36,535 c. $36,665 d. $34,000

4. On October 1, Lawrence Company borrowed $60,000 from FourthNational Bank on a 1-year, 7% note. If the company's fiscal yearends as of December 31, Lawrence should make an entry toincrease

a. interest payable, $1,050. b. prepaid interest, $3,150. c.notes payable, $1,050. d. interest expense, $4,200.

5. Warranty expenses are the result of the selling companyâsestimate of the number of units sold during the current year thatmay become defective and need repair or replacement during thewarranty period.

a. True b. False

6. Estimated liability for product warranties to be paid in thefuture is a long term liability.

a. True b. False

7. The future value of equal semi-annual payments of $500 at 8%compounded semiannually for 4 years is HINT: FV of Annuity of $1The solution to this problem requires time value of moneycalculations. Reference to Tables 9-1 through 9-4 in the text isnecessary to complete the calculations.

a. $ 868 b. $9,320 c. $2,000 d. $4,607

8. What is the correct classification of the account: Discounton Notes Payable?

a. a revenue b. a contra liability c. an asset d. an expense

9. If the annual interest is 12%, but the compounding is donequarterly, then the interest rate is 3% per period.

a. True b. False

10. A convertible bond is one where a. the issuer can convertfrom

a fixed interest rate to a floating one. b. the issuer canconvert it from long-term to short-term. c. the issuer can retirethe bond before its specified due date. d. the holder can convertthe bond into common stock at a future time.

11. Which of the following statements regarding serial bonds istrue?

a.They are likely to be issued by food companies.

b. They have shorter lives than term bonds.

c.They are strongly backed by the issuer's collateral.

d. The bonds do not all mature on the same date.

12. Bonds are a popular source of financing because

a.bond interest expense is deductible for tax purposes, whiledividends paid on stock are not.

b. financial analysts tend to downgrade a company that hasraised large amounts of cash by frequent issues of stock.

c. a company having cash flow problems can postpone payment ofinterest to bondholders.

d. the bondholders can always convert their bonds into stock ifthey choose.

13. When determining the amount of interest to be paid on abond, which of the following information is not necessary?

a.The face amount of the bonds

b. The selling price of the bonds

c.The face rate of interest on the bonds

d. The length of the interest period, annually or semiannually14. Which of the following statements is correct?

a.Bonds are issued at a price that reflects the stated rate ofinterest on the day the bond is purchased.

b. If the face rate of interest on a bond is not equal to themarket rate of interest, then the company desiring to issue thebonds must reprint its bond certificates.

c.The actual issue price of a bond represents the present valueof all future cash flows related to the bond.

d. The market rate of interest has no bearing on the sellingprice of the bonds.

15. Endeavor Company issued 20-year bonds with a coupon rate of6% when the market rate of interest was 9%. This means that thebonds were issued

a.at a premium. b. at a discount. c.at the face value. d. withan additional 3 years of interest.

16. Which of the following statements regarding leases isfalse?

a. Lease agreements are a popular form of financing the purchaseof assets because leases do not require a large initial outlay ofcash.

b. Accounting recognizes two types of leases--operating andcapital leases.

c. If a lessor classifies a lease as a capital lease, then thelessee records a lease liability on its balance sheet.

d. If a lease is classified as an operating lease, the lesseerecords a lease liability on its balance sheet.

17. Which of the following accounts would not appear on thebalance sheet of a lessee company recording a capital lease?

a. Accumulated depreciation on the leased asset

b. Lease obligation in the current liability section

c. Lease obligation in the long-term liability section

d. Rent expense on the income statement

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ACTG 211 Lecture Notes - Lecture 8: Financial Statement, Matching Principle, Contingent Liability

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