Payables and accrued liabilities Flashcards
(16 cards)
Canterbury Co. issues a discounted, noninterest bearing note in exchange for borrowed funds. Which of the following correctly describes the relationships of cash received as compared to the face value of the note and effective interest rate as compared to the discount rate?
Cash received vs.
Face value of note Effective rate vs.
Discount rate
A. Higher Lower
B. Lower Higher
C. Higher Higher
D. Lower Lower
B. Lower Higher
A noninterest bearing note is one that does not have a stated annual rate (also called a face rate or discount rate) of interest but does bear interest. Although an interest rate is not stated, a lender expects the borrower to pay for the use of its money (ie, interest). The interest is deducted from the face amount of the note prior to distributing the cash to the borrower. Therefore, the borrower receives less cash than the face amount (face amount less the interest). The borrower repays the face amount of the note.
The effective interest rate (also called the yield rate or the market rate) is the rate that the borrower incurs. Because the borrower repays the face amount but receives an amount less than the face amount, the effective rate paid will be higher than the discount rate.
Wall Co. sells a product under a two-year warranty. The estimated cost of warranty repairs is 2% of net sales. During Wall’s first two years in business, it made the following sales and incurred the following warranty repair costs:
Year 1
Total sales $250,000
Total repair costs incurred $4,500
Year 2
Total sales $300,000
Total repair costs incurred $5,000
What amount should Wall report as warranty expense for Year 2?
A. $1,000
B. $5,000
C. $5,900
D. $6,000
D. $6,000
Warranty expenses in year 2 is just 300000*.02
For the week ended June 30, Year 5, Free Co. paid gross wages of $20,000, from which federal income taxes of $2,500 and FICA were withheld. All wages paid were subject to FICA tax rates of 7% each for employer and employee. Free makes all payroll-related disbursements from a special payroll checking account. What amount should Free have deposited in the payroll checking account to cover net payroll and related payroll taxes for the week ended June 30, Year 5?
A. $21,400
B. $22,800
C. $23,900
D. $25,300
A. $21,400
20000-2500-1400 = 16100
16100+2500+1400+1400 = 21400
Bal Corp. declared a $25,000 cash dividend on May 8, Year 1, to stockholders of record on May 23, Year 1, payable on June 3, Year 1. As a result of this cash dividend, working capital
A. Was not affected.
B. Decreased on June 3.
C. Decreased on May 23.
D. Decreased on May 8.
D. Decreased on May 8.
Declaration date JE
Debit RE
Credit Div payable
Payment date JE
Debit Div payable
Credit cash
A bond issued on June 1, Year 1, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, Year 1, is for a period of
A. Three months.
B. Four months.
C. Six months.
D. Seven months.
D. Seven months.
Acme Co.’s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:
On December 31, Acme paid $50,000 to a supplier for goods to be manufactured to Acme’s specifications.
Goods shipped FOB destination on December 20 were received and recorded by Acme on January 2, the invoice cost was $45,000.
In its December 31 balance sheet, what amount should Acme report as accounts payable?
A. $850,000
B. $895,000
C. $900,000
D. $945,000
A. $850,000
Accounts payable (A/P) are current liabilities incurred in obtaining goods and services on credit from vendors in the ordinary course of business. A/P have a normal credit balance that is recorded when the goods or services are received. When the vendor is paid, a debit entry to A/P removes the obligation from the books.
When recording the entry for goods purchased in advance, Acme Co. debits a prepaid asset (eg, prepaid inventory) and credit cash. Acme is entitled to a future economic benefit (not obligation) from the cash outflow. A/P are unaffected, and no adjusting entry is required.
The passage of legal title determines whether goods in transit should be included as inventory on an entity’s balance sheet. For goods shipped FOB destination, title passes to the buyer when goods are received. Acme debits inventory and credit A/P on January 2 because that is the day the goods were received and legal title was transferred. No adjusting journal entry is required as of 12/31.
Because neither transaction affects the balance of A/P as of 12/31, the balance is correctly stated at $850,000 (Choices B, C, and D).
Things to remember:
Accounts payable (A/P) have a normal credit balance that is recorded when goods/services are received on credit. When the vendor is paid, an entity will debit the A/P and remove them from the books. A/P are unaffected when a buyer purchases goods in advance, or when goods shipped FOB destination are still in transit.
Lyle, Inc. is preparing its financial statements for the year ended December 31, 2004. Accounts payable amounted to $360,000 before any necessary year-end adjustment related to the following:
At December 31, 2004, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle’s specifications.
Checks in the amount of $100,000 were written to vendors and recorded on December 29, 2004. The checks were mailed on January 5, 2005.
What amount should Lyle report as accounts payable in its December 31, 2004 balance sheet?
A. $510,000
B. $410,000
C. $310,000
D. $210,000
A. $510,000
Balance before adjustments $360,000
Plus the advance, which should be placed in an asset account: advances to supplier. The $50,000 is added to accounts payable because accounts payable was debited on payment of the advance. 50,000
Include the amounts for checks written but not mailed. This amount should be reinstated to cash. 100,000
Equals correct ending balance $510,000
Black Co. requires advance payments with special orders for machinery constructed to customer specifications. These advances are nonrefundable. Information for year 2 is as follows:
Customer advances—balance 12/31/Y1 $118,000
Advances received with orders in year 2 184,000
Advances applied to orders shipped in year 2 164,000
Advances applicable to orders cancelled in year 2 50,000
In Black’s December 31, year 2 balance sheet, what amount should be reported as a current liability for advances from customer?
A. $0
B. $ 88,000
C. $138,000
D. $148,000
B. $ 88,000
Credit 118000
Credit 184000
Debit 164000
debit 50000
Acme Co.’s accounts payable balance at December 31 was $850,000 before necessary year-end adjustments, if any, related to the following information:
- At December 31, Acme has a $50,000 debit balance in its accounts payable resulting from a payment to a supplier for goods to be manufactured to Acme’s specifications.
- Goods shipped FOB destination on December 20 were received and recorded by Acme on January 2; the invoice cost was $45,000.
In its December 31 balance sheet, what amount should Acme report as accounts payable?
A. $850,000
B. $895,000
C. $900,000
D. $945,000
C. $900,000
Add the 50000
Kent Co., a division of National Realty, Inc., maintains escrow accounts and pays real estate taxes for National’s mortgage customers. Escrow funds are kept in interest-bearing accounts. Interest, less a 10% service fee, is credited to the mortgagee’s account and used to reduce future escrow payments. Additional information follows:
Escrow accounts liability, 1/1/Y2 $ 700,000
Escrow payments received during year 2 1,580,000
Real estate taxes paid during year 2 1,720,000
Interest on escrow funds during year 2 50,000
What amount should Kent report as escrow accounts liability in its December 31, year 2 balance sheet?
A. $510,000
B. $515,000
C. $605,000
D. $610,000
C. $605,000
Credit 700000
credit 1580000
credit 45000 (interest less fee)
debit taxes paid
If the payment of compensation is probable, the amount can be reasonably estimated, and the obligation relates to rights that vest, employees’ compensation for future absences should be
A. Accrued if attributable to employees’ services already rendered.
B. Accrued if attributable to employees’ services not already rendered.
C. Accrued if attributable to employees’ services whether already rendered or not.
D. Recognized when paid.
A. Accrued if attributable to employees’ services already rendered.
During year 1, Gum Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within twelve months following the sale and 4% in the second twelve months following the sale. Sales and actual warranty expenditures for the years ended December 31, year 1 and year 2, are as follows:
Sales Actual warranty expenditures
Year 1 $150,000 $2,250
Year 2 250,000 7,500
$400,000 $9,750
What amount should Gum report as estimated warranty liability in its December 31, year 2 balance sheet?
A. $ 2,500
B. $ 4,250
C. $11,250
D. $14,250
D. $14,250
You use 6% for all sales and then subtract the expenditures
Under what circumstances may the obligation for warranties be recorded at fair value?
A. If the warranty obligation is satisfied within 24 months.
B. If the warranty obligation can be settled by contracting with a third party.
C. If the cost to provide the warranty work is less than the fair value.
D. If the fair value of the warranty work can be estimated by using a cost-plus approach.
B. If the warranty obligation can be settled by contracting with a third party.
Pak Co.’s professional fees expense account had a balance of $82,000 on December 31, 20X1, before considering year-end adjustments relating to the following:
Consultants were hired for a special project at a total fee not to exceed $65,000. Pak has recorded $55,000 of this fee based on billings for work performed in 20X1.
The attorney’s letter requested by the auditors dated January 28, 20X2, indicated that legal fees of $6,000 were billed on January 15, 20X2, for work performed in November 20X1, and unbilled fees for December 20X1 were $7000.
What amount should Pak report for professional fees expense for the year ended December 31, 20X1?
A. $105,000
B. $95,000
C. $88,000
D. $82,000
B. $95,000
(Choice A) This amount includes the $10,000 of consulting fees not yet earned. The expense amount of $82,000 already includes the $55,000 amount for the work performed in 20X1.
(Choice B) The two amounts listed in the attorney’s letter should be added to the preadjusted amount of expense, but the appropriate amount of the consultant expense has been included in the preadjusted amount. The ending expense balance therefore is $95,000 ($82,000 + $6,000 + $7,000).
(Choice C) This amount excludes the unbilled legal fees for December 20X1 of $7,000. The law firm does not bill until it has performed service. Therefore this amount should be included in the final expense balance.
(Choice D) The two amounts listed in the attorney’s letter should be added to the preadjusted amount of expense because these amounts represent the cost of service received by the end of 20X1. The ending expense balance therefore is $95,000 ($82,000 + $6,000 + $7,000).
Dana Co.’s officers’ compensation expense account had a balance of $224,000 at December 31, 20X4 before any appropriate year-end adjustment relating to the following:
No salary accrual was made for December 30-31, 20X4. Salaries for the two-day period totaled $3,500.
20X4 officers’ bonuses of $62,500 were paid on January 31, 20X5.
In its 20X4 income statement, what amount should Dana report as officers’ compensation expense?
A. $290,000
B. $286,500
C. $227,500
D. $224,000
A. $290,000
Both adjustments are included in compensation expense because they are costs of services rendered by employees in 20X4. The firm has incurred a liability and therefore an expense as of 12/31/X4 for each of these items. $290,000 = $224,000 + $3,500 + $62,500.
On November 30, year 1, Tyrola Publishing Company, located in Colorado, executed a contract with Ernest Blyton, an author from Canada, providing for payment of 10% royalties on Canadian sales of Blyton’s book. Payment is to be made in Canadian dollars each January 10 for the previous year’s sales. Canadian sales of the book for the year ended December 31, year 2, totaled $50,000 Canadian. Tyrola paid Blyton his year 2 royalties on January 10, year 3. Tyrola’s year 2 financial statements were issued on February 1, year 3. Spot rates for Canadian dollars were as follows:
November 30, year 1 $.87
January 1, year 2 $.88
December 31, year 2 $.89
January 10, year 3 $.90
How much should Tyrola accrue for royalties payable at December 31, year 2?
A. $4,350
B. $4,425
C. $4,450
D. $4,500
C. $4,450
Use spot rate for year ending
