D249 - Intermediate Financial Accounting II 2 - Module 1 Quiz

The acid-test ratio relates total current liabilities to cash and what other accounts?

Short Term Investments and Receivables. Acid Test Ratio = (Cash + Short Term Investments + Net Receivables) / Current Liabilities

What does the Current Ratio inform you about a company?

The company's liquidity Current Assets / Current Liabilities = Current Ratio The ability to pay off current obligations.

Excom manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $300 per unit sold and reported a liability for estimated warranty costs $10.4 Million at the beginning of the year. If during the current year, the company sold 60,000 units for a total of $324 Million and paid warranty claims of $12 Million on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year?

$16,400,000 Beginning Estimated Warranty costs + Warranty Revenue - Paid Warranty Claims = Loss Contingency Balance. $10,400,000 + (60,000 * $300) - $12,000,000 = $16,400,000

How do you determine the acid-test ratio?

(Cash + Short Term Investments + Net Receivables) / Current Liabilities = Acid Test Ratio Net Receivables = Gross Trade Receivables - Allowance for Doubtful Accounts

Presented below is information available for Marley Company. Current Assets: Cash - $4,000 Short-Term Investments - $55,000 Accounts Receivable - $61,000 Inventory - $110,000 Prepaid Expenses - $30,000 Total Current Assets - $260,000 Total Current Liabilities - $100,000 What is the acid-test ratio for Marley Company?

1.2 to 1 Acid Test Ratio = (Cash + Short Term Investments + Net Receivables) / Current Liabilities ($4,000 + $55,000 + $61,000) / $100,000

Wooten Co is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it IS PROBABLE that Wooten will lose the suit and be found liable for a judgement costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000. As a result of the above facts, what is the correct treatment of Wooten's contingent obligation?

As a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000.

How are accrued liabilities disclosed in the financial statements?

By appropriately classifying them as regular liabilities in the balance sheet. Accrued liabilities are treated as if the expense occured in the reporting period and are included on the balance sheet as regular liabilities.

Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are Notes Payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. How should these notes be classified on the balance sheet of Larsen Company?

Current Liabilities

Johnson & Wishe, Inc. enters into a purchase agreement with Fliee, Inc. Johnson agrees to pay Fliee $200,000 with a note payable. The note has an interest rate of 5%. Both principal and interest are due in one year. How is this liability recorded on Johnson's year-end Balance Sheet?

Current Note Payable: $200,000 Current Interest Payable $10,000 $200,000 * 0.05 = $10,000 (Total Due = $210,000)

Bargain Surplus made cash sales during the month of October of $375,000. The sales are subject to a 6% sales tax that was also collected. What would be included in the summary journal entry to reflect the sale transactions?

Debit Cash $22,500 Credit Sales Tax Payable $22,500 $375,000 * 0.06 = $22,500

What, if any, is the relationship between current liabilities and a company's operating cycle?

Liquidation of current liabilities is reasonably expected within the company's operating cycle or one year, if less.

What defines liabilities?

Obligations arising from past transactions and payable in assets or services in the future

For what purpose is the current liability section of the Balance Sheet of primary importance to bankers?

To assist in understanding the entity's liquidity. (The ability of the company to pay its obligations)

When is a contingent Liability recorded?

When the future events are probably to occur and the amount can be reasonably estimated.