NU ACCT 1201 - Chapter 9. Reporting and Interpreting Liabilities

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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 retiredemployee (payments starting December 31, 2014). What single sum must be deposited in the bank on January 1, 2014?13. You have just won the state lottery and have two choices for collecting your winnings. You can collect $100,000 (Option1):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 CreditWhat is the interest for the four years?General journal Debit Credit2Prepare 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 endof the 7th year. Determine the present value of the debtb. 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?3What 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 = $45,078b. 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 = $24,869It is better to pay in three installments because the economic cost is less.4c. 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 = $46,188d. Decided to deposit a single sum in the bank that will provide 10 equal annual year-end payments of $40,000 to a retiredemployee (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 = $245,7843. You have just won the state lottery and have two choices for collecting your winnings. You can collect $100,000 (Option1):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 2:100,000 97,368Present value of annuity:: $20,000 × 4.8684 = $97,368Because 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


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NU ACCT 1201 - Chapter 9. Reporting and Interpreting Liabilities

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