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Exam 9: Reporting and Interpreting Liabilities

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Question 51

Multiple Choice

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Which of the following transactions will decrease the accounts payable turnover ratio?

A) Using cash to pay an accounts payable balance.
B) Selling inventory on account.
C) Selling inventory for cash.
D) A customer returning inventory sold on account.

E) A) and B)
F) A) and C)

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Question 52

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Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The machine reported on the balance sheet as of the purchase date is closest to:

A) $123,255.
B) $130,000.
C) $80,000.
D) $73,255.

E) B) and C)
F) A) and D)

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Question 53

Multiple Choice

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Mission Corp. borrowed $50,000 cash on April 1, 2016, and signed a one-year 12%, interest-bearing note payable. The interest and principal are both due on March 31, 2017. The amount of interest expense for the year ended December 31, 2016 is:

Border Company purchased a truck that cost $17,000. The company signed a $17,000 note payable that specified four equal annual payments (at each year-end), each of which includes a payment on the principal and interest on the unpaid balance at 10% per annum. Required: A.Calculate the amount of each equal payment (round your answer to the nearest whole dollar amount). B.Prepare the journal entry to record the purchase of the truck. C.Prepare the journal entry to record the first annual payment on the note (assume no interest has been accrued during the year). D.Will the interest paid with the first annual payment be more than, or less than, the interest paid with the second annual payment? Explain your answer.

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

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The equipment reported on the balance sheet as of the purchase date is closest to:

A current liability is always a short-term obligation expected to be paid within one year of the balance sheet date.

A company's income statement reported net income of $40,000 during 2016. The income tax return excluded a revenue item of $3,000 (reported on the income statement) because under the tax laws the $3,000 would not be reported for tax purposes until 2017. Which of the following statements is correct assuming a 35% tax rate?

The accounts payable turnover ratio is calculated by dividing accounts payable by cash payments to suppliers.

Purdum Farms borrowed $10 million by signing a five-year note on December 31, 2015. Repayments of the principal are payable annually in installments of $2 million each. Purdum Farms makes the first payment on December 31, 2016 and then prepares its balance sheet. What amount will be reported as current and long-term liabilities, respectively, in connection with the note at December 31, 2016, after the first payment is made?

Working capital is a measure of long-term liquidity and is calculated by subtracting the current liabilities from the current assets.

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

Alden Trucking Company is replacing part of its fleet of trucks by purchasing them under a note agreement with Kenworthy on January 1, 2016. Alden financed $37,908,000, and the note agreement will require $10 million in annual payments starting on December 31, 2016 and continuing for a total of four more years (final payment December 31, 2020) . Kenworthy will charge Alden Trucking Company the market interest rate of 10% compounded annually. What is the amount of the 2017 interest expense?

The FICA (social security) tax is a matching tax with a portion paid by both the employer and the employee.

The choice of inventory method has an impact on the accounts payable turnover ratio.

Which of the following statements incorrectly describes the accounts payable turnover ratio?

Working capital increases when a company purchases equipment and signs a 2-year note payable.

A company borrowed $100,000 at 6% interest on September 1, 2016. Assuming adjusting entries have not been made during the year, the entry to record interest accrued on December 31, 2016 would include a debit to interest expense and a credit to interest payable for $2,000.

Black Corporation entered into the following transactions: • The accrual of wages and salaries expense. • The cash sale of equipment for a loss. • The cash payment in advance for a one-year insurance policy. Which of the following statements is correct with respect to determining Black's cash flows from operating activities on the statement of cash flows?

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and one payment of $100,000 ten years from the purchase date. The first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. The liability reported at on the balance sheet as of the purchase date, after the initial $90,000 payment was made, is closest to: