Chapter 9 Reporting and Interpreting Liabilities 1 Diane Corporation is preparing its 2015 balance sheet The company records show the following selected amounts at the end of the accounting period December 31 2015 Compute working capital Compute the quick ratio quick assets are 70 000 Would your computation be different if the company reported 250 000 worth of contingent liabilities in the notes to the statements 2 On January 1 2014 Shannon Company completed the following transactions assume a 10 percent annual interest rate a Bought a delivery truck and agreed to pay 60 000 at the end of three years What is the cost of the truck that should be recorded at the time of purchase b Rented an office building and was given the option of paying 10 000 at the end of each of the next three years or paying 28 000 immediately Which option for the office building should the company select c Established a savings account by depositing a single amount that will increase to 90 000 at the end of seven years What single amount must be deposited in this account on January 1 2014 d Decided to deposit a single sum in the bank that will provide 10 equal annual year end payments of 40 000 to a retired employee payments starting December 31 2014 What single sum must be deposited in the bank on January 1 2014 1 3 You have just won the state lottery and have two choices for collecting your winnings You can collect 100 000 Option 1 today or receive 20 000 Option 2 per year for the next seven years A financial analyst has told you that you can earn 10 percent on your investments Calculate the present value of both the options Which alternative should you select Option 1 Option 2 4 You have decided to buy a used car The dealer has offered you two options a Pay 500 per month for 20 months and an additional 10 000 at the end of 20 months The dealer is charging 24 percent per annum b When you buy the car pay cash equal to the present value of the payments in option a Determine how much cash the dealer would charge in option b 5 On January 1 2014 Alan King decided to deposit 58 800 in a savings account that will provide funds four years later to send his son to college The savings account will earn 8 percent which will be added to the fund each year end How much will be available in four years Prepare the journal entry that Alan should make on January 1 2014 General journal Debit Credit What is the interest for the four years General journal Debit Credit 2 Prepare the journal entry that Alan should make on December 31 2014 and December 31 2015 6 On January 1 2014 Boston Company completed the following transactions use a 7 percent annual interest rate for all transactions a Borrowed 115 000 for seven years Will pay 6 000 interest at the end of each year and repay the 115 000 at the end of the 7th year Determine the present value of the debt b Established a plant addition fund of 490 000 to be available at the end of year 8 A single sum that will grow to 490 000 will be deposited on January 1 2014 What single sum amount must the company deposit on January 1 2014 What is the total amount of interest revenue that will be earned c Agreed to pay a severance package to a discharged employee The company will pay 75 000 at the end of the first year 112 500 at the end of the second year and 150 000 at the end of the third year Determine the present value of this obligation d Purchased a 170 000 machine on January 1 2014 and paid cash 34 000 A five year note payable is signed for the balance The note will be paid in five equal year end payments starting on December 31 2014 What is the amount of each of the equal annual payments that will be paid on the note 3 What is the total amount of interest expense that will be incurred Chapter 9 Reporting and Interpreting Liabilities 2 Diane Corporation is preparing its 2015 balance sheet The company records show the following selected amounts at the end of the accounting period December 31 2015 Compute working capital Compute the quick ratio quick assets are 70 000 Quick ratio 70 000 102 400 0 68 Would your computation be different if the company reported 250 000 worth of contingent liabilities in the notes to the statements No contingent liabilities are reported in the notes not on the balance sheet Therefore they are not included in the required computations 2 On January 1 2014 Shannon Company completed the following transactions assume a 10 percent annual interest rate a Bought a delivery truck and agreed to pay 60 000 at the end of three years What is the cost of the truck that should be recorded at the time of purchase Cost of the truck 60 000 0 7513 45 078 b Rented an office building and was given the option of paying 10 000 at the end of each of the next three years or paying 28 000 immediately Which option for the office building should the company select 10 000 2 4869 24 869 It is better to pay in three installments because the economic cost is less 4 c Established a savings account by depositing a single amount that will increase to 90 000 at the end of seven years What single amount must be deposited in this account on January 1 2014 Amount to deposit 90 000 0 5132 46 188 d Decided to deposit a single sum in the bank that will provide 10 equal annual year end payments of 40 000 to a retired employee payments starting December 31 2014 What single sum must be deposited in the bank on January 1 2014 Amount to deposit 40 000 6 1446 245 784 3 You have just won the state lottery and have two choices for collecting your winnings You can collect 100 000 Option 1 today or receive 20 000 Option 2 per year for the next seven years A financial analyst has told you that you can earn 10 percent on your investments Calculate the present value of both the options Which alternative should you select Option 1 100 000 Option 2 97 368 Present value of annuity 20 000 4 8684 97 368 Because the present value of the annuity is less than the immediate cash payment the winner should select the cash payment 4 You have decided to buy a used car The dealer has offered you two options a Pay 500 per month for 20 months and an additional 10 000 at the end of 20 months The dealer is charging 24 percent per annum b When you buy the car pay cash equal to the present value of the payments in option a Determine how much cash the …
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