Current Liabilities and Contingencies

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Contents

Continuing Case Solutions
Excel Template Solutions
Excel Templates
Exercise Set B Solutions
Instructor Manual - PDF Files
Rockford PS Solutions
Solution Manual - PDF Files
Test Bank - PDF Files

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Chapter 13 Current Liabilities and Contingencies
QUESTIONS
1. Distinguish between a current liability and a long-term debt.
2
. Assume that your friend Will Morris, who is a music major, asks you to define and discuss the nature of a liability.
Assist him by preparing a definition of a liability and by explaining to him what you believe are the elements or factors inherent in the concept of a liability.
3
. Why is the liabilities section of
4
. How are current liabilities related by definition to current assets? How are current liabilities related to a company’s operating cycle?
5
. Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client’s liquidity? Explain.
6
. How is present value related to the concept of a liability?
7
. What is the nature of a “discount” on notes payable?
8
. How should a debt callable by the creditor be reported in the debtor’s financial statements?
9
. Under what conditions should a short-term obligation be excluded from current liabilities?
1
0. What evidence is necessary to demonstrate the ability to consummate the refinancing of short-term debt?
1
1. Discuss the accounting treatment or disclosure that should be accorded a declared but unpaid cash dividend, an accumulated but undeclared dividend on cumulative preferred stock, and a stock dividend distributable.
1
2. How does unearned revenue arise? Why can it be classified properly as a current liability? Give several examples of business activities that result in unearned revenues.
1
3. What are compensated absences?
1
4. Under what conditions must an employer accrue a liability for the cost of compensated absences?
1
5. Under what conditions is an employer required to accrue a liability for sick pay? Under what conditions is an employer permitted but not required to accrue a liability for sick pay?
1
6. Faith Battle operates a health food store, and she has been the only employee. Her business is growing, and she is considering hiring some additional staff to help her in the store. Explain to her the various payroll deductions that she will have to account for, including their potential impact on her financial statements, if she hires additional staff.
1
7. Define (a) a contingency and (b) a contingent liability.
1
8. Under what conditions should a contingent liability be recorded?
1
9. Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.
2
0. How are the terms “probable,” “reasonably possible,” and “remote” related to contingent liabilities?
2
1. Contrast the cash-basis method and the accrual method of accounting for warranty costs.
2
2. Grant Company has had a record-breaking year in terms of growth in sales and profitability. However, market research indicates that it will experience operating losses in two of its major businesses next year. The controller has proposed that the company record a provision for these future losses this year, since it can afford to take the charge and still show good results. Advise the controller on the appropriateness of this charge.
2
3. How does the expense warranty approach differ from the sales warranty approach?
2
4. Southeast Airlines Inc. awards members of its Flightline program a second ticket at half price, valid for 2 years anywhere on its flight system, when a full-price ticket is purchased. How would you account for the full-fare and half-fare tickets?
2
5. Pacific Airlines Co. awards members of its Frequent
Fliers Club one free round-trip ticket, anywhere on its flight system, for every 50,000 miles flown on its planes.
How would you account for the free ticket award?
2
6. When must a company recognize an asset retirement obligation?
2
7. Should a liability be recorded for risk of loss due to lack of insurance coverage? Discuss.
2
8. What factors must be considered in determining whether or not to record a liability for pending litigation? For threatened litigation?
2
9. Within the current liabilities section, how do you believe the accounts should be listed? Defend your position.
3
0. How does the acid-test ratio differ from the current ratio?
How are they similar?
3
1. When should liabilities for each of the following items be recorded on the books of an ordinary business corporation?
(
a) Acquisition of goods by purchase on credit.
(
b) Officers’ salaries.
(
c) Special bonus to employees.
(
d) Dividends.
(
e) Purchase commitments.


BRIEF EXERCISES

BE13-
1 Roley Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. On July 1, Roley purchased $60,000 of inventory, terms 2/10, n/30, FOB shipping point.
Roley paid freight costs of $1,200. On July 3, Roley returned damaged goods and received credit of $6,000.
On July 10, Roley paid for the goods. Prepare all necessary journal entries for Roley.


BE13-2
Upland Company borrowed $40,000 on November 1, 2014, by signing a $40,000, 9%, 3-month note. Prepare Upland’s November 1, 2014, entry; the December 31, 2014, annual adjusting entry; and the
February 1, 2015, entry.

BE13-
3 Takemoto Corporation borrowed $60,000 on November 1, 2014, by signing a $61,350, 3-month, zero-interest-bearing note. Prepare Takemoto’s November 1, 2014, entry; the December 31, 2014, annual adjusting entry; and the February 1, 2015, entry.

BE13-
4 At December 31, 2014, Burr Corporation owes $500,000 on a note payable due February 15, 2015.
(a) If Burr refinances the obligation by issuing a long-term note on February 14 and using the proceeds to pay off the note due February 15, how much of the $500,000 should be reported as a current liability at December 31, 2014? (b) If Burr pays off the note on February 15, 2015, and then borrows $1,000,000 on a long-term basis on March 1, how much of the $500,000 should be reported as a current liability at December 31, 2014, the end of the fiscal year?

BE13-
5 Sport Pro Magazine sold 12,000 annual subscriptions on August 1, 2014, for $18 each. Prepare
Sport Pro’s August 1, 2014, journal entry and the December 31, 2014, annual adjusting entry, assuming the magazines are published and delivered monthly.

BE13-
6 Dillons Corporation made credit sales of $30,000 which are subject to 6% sales tax. The corporation also made cash sales which totaled $20,670 including the 6% sales tax. (a) Prepare the entry to record
Dillons’ credit sales. (b) Prepare the entry to record Dillons’ cash sales.

BE13-
7 Lexington Corporation’s weekly payroll of $24,000 included FICA taxes withheld of $1,836, federal taxes withheld of $2,990, state taxes withheld of $920, and insurance premiums withheld of $250. Prepare the journal entry to record Lexington’s payroll.

BE13-
8 Kasten Inc. provides paid vacations to its employees. At December 31, 2014, 30 employees have each earned 2 weeks of vacation time. The employees’ average salary is $500 per week. Prepare Kasten’s
December 31, 2014, adjusting entry.

BE13-
9 Mayaguez Corporation provides its officers with bonuses based on net income. For 2014, the bonuses total $350,000 and are paid on February 15, 2015. Prepare Mayaguez’s December 31, 2014, adjusting entry and the February 15, 2015, entry.

BE13-
10 Scorcese Inc. is involved in a lawsuit at December 31, 2014. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the
December 31 entry, if any, assuming it is
not probable that Scorcese will be liable for any payment as a result of this suit.

BE13-
11 Buchanan Company recently was sued by a competitor for patent infringement. Attorneys have determined that it is probable that Buchanan will lose the case and that a reasonable estimate of damages to be paid by Buchanan is $300,000. In light of this case, Buchanan is considering establishing a $100,000 selfinsurance allowance. What entry(ies), if any, should Buchanan record to recognize this loss contingency?

BE13-
12 Calaf’s Drillers erects and places into service an off-shore oil platform on January 1, 2015, at a cost of $10,000,000. Calaf is legally required to dismantle and remove the platform at the end of its useful life in
10 years. Calaf estimates it will cost $1,000,000 to dismantle and remove the platform at the end of its useful life in 10 years. (The fair value at January 1, 2015, of the dismantle and removal costs is $450,000.) Prepare the entry to record the asset retirement obligation.

BE13-
13 Streep Factory provides a 2-year warranty with one of its products which was first sold in
2014. In that year, Streep spent $70,000 servicing warranty claims. At year-end, Streep estimates that an additional $400,000 will be spent in the future to service warranty claims related to 2014 sales. Prepare
Streep’s journal entry to record the $70,000 expenditure and the December 31 adjusting entry, assuming the expenditures are inventory costs.

BE13-
14 Leppard Corporation sells DVD players. The corporation also offers its customers a 2-year warranty contract. During 2014, Leppard sold 20,000 warranty contracts at $99 each. The corporation spent $180,000 servicing warranties during 2014, and it estimates that an additional $900,000 will be spent in the future to service the warranties. Prepare Leppard’s journal entries for (a) the sale of contracts, (b) the cost of servicing the warranties, and (c) the recognition of warranty revenue. Assume the service costs are inventory costs.

BE13-
15 Wynn Company offers a set of building blocks to customers who send in 3 UPC codes from Wynn cereal, along with 50. The block sets cost Wynn $1.10 each to purchase and 60 each to mail to customers.
During 2014, Wynn sold 1,200,000 boxes of cereal. The company expects 30% of the UPC codes to be sent in. During 2014, 120,000 UPC codes were redeemed. Prepare Wynn’s December 31, 2014, adjusting entry.


EXERCISES

E13-
1 (Balance Sheet Classification of Various Liabilities)
How would each of the following items be reported on the balance sheet?
(
a) Accrued vacation pay. (j) Premium offers outstanding.
(
b) Estimated taxes payable. (k) Discount on notes payable.
(
c) Service warranties on appliance sales. (l) Personal injury claim pending.
(
d) Bank overdraft. (m) Current maturities of long-term
(
e) Employee payroll deductions unremitted. debts to be paid from current assets.
(
f) Unpaid bonus to officers. (n) Cash dividends declared but unpaid.
(
g) Deposit received from customer to guarantee (o) Dividends in arrears on preferred performance of a contract. stock.
(
h) Sales taxes payable. (p) Loans from officers.
(
i) Gift certificates sold to customers but not yet redeemed.

E13-
2 (Accounts and Notes Payable) The following are selected 2014 transactions of Sean Astin Corporation.
S
ept. 1 Purchased inventory from Encino Company on account for $50,000. Astin records purchases gross and uses a periodic inventory system.
Oct. 1 Issued a $50,000, 12-month, 8% note to Encino in payment of account.
Oct. 1 Borrowed $50,000 from the Shore Bank by signing a 12-month, zero-interest-bearing $54,000 note.
Instructions

(
a)
Prepare journal entries for the selected transactions above.
(
b) Prepare adjusting entries at December 31.
(
c) Compute the total net liability to be reported on the December 31 balance sheet for:
(
1) The interest-bearing note.
(
2) The zero-interest-bearing note.

E13-
3 (Refinancing of Short-Term Debt) On December 31, 2014, Hattie McDaniel Company had $1,200,000 of short-term debt in the form of notes payable due February 2, 2015. On January 21, 2015, the company issued 25,000 shares of its common stock for $38 per share, receiving $950,000 proceeds after brokerage fees and other costs of issuance. On February 2, 2015, the proceeds from the stock sale, supplemented by an additional $250,000 cash, are used to liquidate the $1,200,000 debt. The December 31, 2014, balance sheet is issued on February 23, 2015.
Instructions

S
how how the $1,200,000 of short-term debt should be presented on the December 31, 2014, balance sheet, including note disclosure.

E13-
4 (Refinancing of Short-Term Debt) On December 31, 2014, Kate Holmes Company has $7,000,000 of short-term debt in the form of notes payable to Gotham State Bank due in 2015. On January 28, 2015,
Holmes enters into a refinancing agreement with Gotham that will permit it to borrow up to 60% of the gross amount of its accounts receivable. Receivables are expected to range between a low of $6,000,000 in
May to a high of $8,000,000 in October during the year 2015. The interest cost of the maturing short-term debt is 15%, and the new agreement calls for a fluctuating interest at 1% above the prime rate on notes due in 2019. Holmes’s December 31, 2014, balance sheet is issued on February 15, 2015.
Instructions

P
repare a partial balance sheet for Holmes at December 31, 2014, showing how its $7,000,000 of short-term debt should be presented, including footnote disclosure.

E13-
5 (Compensated Absences) Matt Broderick Company began operations on January 2, 2013. It employs 9 individuals who work 8-hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate. Additional information is as follows.
A
ctual Hourly Vacation Days Used Sick Days Used
Wage Rate by Each Employee by Each Employee
2013 2014 2013 2014 2013 2014 $10 $11 0 9 4 5
M
att Broderick Company has chosen to accrue the cost of compensated absences at rates of pay in effect during the period when earned and to accrue sick pay when earned.
Instructions
(
a)
Prepare journal entries to record transactions related to compensated absences during 2013 and 2014.
(
b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2013 and 2014.

E13-
6 (Compensated Absences) Assume the facts in E13-5 except that Matt Broderick Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. The company used the following projected rates to accrue vacation time.
Y
ear in Which Vacation Projected Future Pay Rates Time Was Earned Used to Accrue Vacation Pay
2013 $10.75
2014 11.60
Instructions

(
a)
Prepare journal entries to record transactions related to compensated absences during 2013 and
2014.
(
b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2013, and 2014.

E13-
7 (Adjusting Entry for Sales Tax) During the month of June, Rowling Boutique had cash sales of $233,200 and credit sales of $153,700, both of which include the 6% sales tax that must be remitted to the state by July 15.
Instructions

P
repare the adjusting entry that should be recorded to fairly present the June 30 financial statements.

E13-
8 (Payroll Tax Entries) The payroll of YellowCard Company for September 2013 is as follows.
Total payroll was $480,000, of which $110,000 is exempt from Social Security tax because it represented amounts paid in excess of $113,700 to certain employees. The amount paid to employees in excess of $7,000 was $400,000. Income taxes in the amount of $80,000 were withheld, as was $9,000 in union dues. The state unemployment tax is 3.5%, but YellowCard Company is allowed a credit of 2.3% by the state for its unemployment experience. Also, assume that the current FICA tax is 7.65% on an employee’s wages to $113,700 and 1.45% in excess of $113,700. No employee for YellowCard makes more than $125,000. The federal unemployment tax rate is 0.8% after state credit.
Instructions

P
repare the necessary journal entries if the wages and salaries paid and the employer payroll taxes are recorded separately.

E13-
9 (Payroll Tax Entries) Green Day Hardware Company’s payroll for November 2014 is summarized below.
mount Subject to Payroll Taxes
Unemployment Tax
Payroll Wages Due FICA Federal State
Factory $120,000 $120,000 $40,000 $40,000
Sales 32,000 32,000 4,000 4,000
Administrative 36,000 36,000 — —
Total $188,000 $188,000 $44,000 $44,000
A
t this point in the year, some employees have already received wages in excess of those to which payroll taxes apply. Assume that the state unemployment tax is 2.5%. The FICA rate is 7.65% on an employee’s wages to $113,700 and 1.45% in excess of $113,700. Of the $188,000 wages subject to FICA tax, $20,000 of the sales wages is in excess of $113,700. Federal unemployment tax rate is 0.8% after credits. Income tax withheld amounts to $16,000 for factory, $7,000 for sales, and $6,000 for administrative.
Instructions

(
a)
Prepare a schedule showing the employer’s total cost of wages for November by function. (Round all computations to nearest dollar.)
(
b) Prepare the journal entries to record the factory, sales, and administrative payrolls including the employer’s payroll taxes.

E13-
10 (Warranties) Soundgarden Company sold 200 color laser copiers in 2014 for $4,000 apiece, together with a one-year warranty. Maintenance on each copier during the warranty period averages $330.
(a) Prepare entries to record the sale of the copiers and the related warranty costs, assuming that the accrual method is used. Actual warranty costs incurred in 2014 were $17,000.
(
b) On the basis of the data above, prepare the appropriate entries, assuming that the cash-basis method is used.

E13-
11 (Warranties) Sheryl Crow Equipment Company sold 500 Rollomatics during 2014 at $6,000 each.
During 2014, Crow spent $20,000 servicing the 2-year warranties that accompany the Rollomatic. All applicable transactions are on a cash basis.
Instructions

(
a)
Prepare 2014 entries for Crow using the expense warranty approach. Assume that Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years.
(
b) Prepare 2014 entries for Crow assuming that the warranties are not an integral part of the sale.
Assume that of the sales total, $150,000 relates to sales of warranty contracts. Crow estimates the total cost of servicing the warranties will be $120,000 for 2 years. Estimate revenues to be recognized on the basis of costs incurred and estimated costs.

E13-
12 (Premium Entries) No Doubt Company includes 1 coupon in each box of soap powder that it packs, and 10 coupons are redeemable for a premium (a kitchen utensil). In 2014, No Doubt Company purchased 8,800 premiums at 80 cents each and sold 110,000 boxes of soap powder at $3.30 per box; 44,000 coupons were presented for redemption in 2014. It is estimated that 60% of the coupons will eventually be presented for redemption.
Instructions

P
repare all the entries that would be made relative to sales of soap powder and to the premium plan in
2014.

E13-
13 (Contingencies) Presented below are three independent situations. Answer the question at the end of each situation.
1
. During 2014, Salt-n-Pepa Inc. became involved in a tax dispute with the IRS. Salt-n-Pepa’s attorneys have indicated that they believe it is probable that Salt-n-Pepa will lose this dispute. They also believe that Salt-n-Pepa will have to pay the IRS between $900,000 and $1,400,000. After the 2014 financial statements were issued, the case was settled with the IRS for $1,200,000. What amount, if any, should be reported as a liability for this contingency as of December 31, 2014?
2
. On October 1, 2014, Alan Jackson Chemical was identified as a potentially responsible party by the
Environmental Protection Agency. Jackson’s management along with its counsel have concluded that it is probable that Jackson will be responsible for damages, and a reasonable estimate of these damages is $5,000,000. Jackson’s insurance policy of $9,000,000 has a deductible clause of $500,000.
How should Alan Jackson Chemical report this information in its financial statements at December 31, 2014?
3
. Melissa Etheridge Inc. had a manufacturing plant in Sudan, which was destroyed in the civil war. It is not certain who will compensate Etheridge for this destruction, but Etheridge has been assured by governmental officials that it will receive a definite amount for this plant. The amount of the compensation will be less than the fair value of the plant, but more than its book value. How should the contingency be reported in the financial statements of Etheridge Inc.?

E13-
14 (Asset Retirement Obligation) Oil Products Company purchases an oil tanker depot on January 1,
2014, at a cost of $600,000. Oil Products expects to operate the depot for 10 years, at which time it is legally required to dismantle the depot and remove the underground storage tanks. It is estimated that it will cost $75,000 to dismantle the depot and remove the tanks at the end of the depot’s useful life.
Instructions

(
a)
Prepare the journal entries to record the depot and the asset retirement obligation for the depot on
January 1, 2014. Based on an effective-interest rate of 6%, the present value of the asset retirement obligation on January 1, 2014, is $41,879.
(
b) Prepare any journal entries required for the depot and the asset retirement obligation at December 31, 2014. Oil Products uses straight-line depreciation; the estimated salvage value for the depot is zero.
(
c) On December 31, 2023, Oil Products pays a demolition firm to dismantle the depot and remove the tanks at a price of $80,000. Prepare the journal entry for the settlement of the asset retirement obligation.

E13-
15 (Premiums) Presented below and on page 740 are three independent situations.
1
. Hairston Stamp Company records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Hairston’s past experience indicates that only 80% of the stamps sold to licensees will be redeemed. Hairston’s liability for stamp redemptions was $13,000,000 at December 31, 2013. Additional information for 2014 is as follows.
S
tamp service revenue from stamps sold to licensees $9,500,000
Cost of redemptions (stamps sold prior to 1/1/14) 6,000,000
I
f all the stamps sold in 2014 were presented for redemption in 2015, the redemption cost would be $5,200,000. What amount should Hairston report as a liability for stamp redemptions at December 31, 2014?
2
. In packages of its products, Burnitz Inc. includes coupons that may be presented at retail stores to obtain discounts on other Burnitz products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Burnitz honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Burnitz estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Burnitz during 2014 is as follows.
C
onsumer expiration date 12/31/14
Total face amount of coupons issued $800,000
Total payments to retailers as of 12/31/14 330,000
W
hat amount should Burnitz report as a liability for unredeemed coupons at December 31, 2014?
3
. Roland Company sold 700,000 boxes of pie mix under a new sales promotional program. Each box contains one coupon, which submitted with $4.00, entitles the customer to a baking pan. Roland pays $6.00 per pan and $0.50 for handling and shipping. Roland estimates that 70% of the coupons will be redeemed, even though only 250,000 coupons had been processed during 2014. What amount should Roland report as a liability for unredeemed coupons at December 31, 2014?
(AICPA adapted)

E13-
16 (Financial Statement Impact of Liability Transactions) Presented below is a list of possible transactions.
1
. Purchased inventory for $80,000 on account (assume perpetual system is used).
2
. Issued an $80,000 note payable in payment on account (see item 1 above).
3
. Recorded accrued interest on the note from item 2 above.
4
. Borrowed $100,000 from the bank by signing a 6-month, $112,000, zero-interest-bearing note.
5
. Recognized 4 months’ interest expense on the note from item 4 above.
6
. Recorded cash sales of $75,260, which includes 6% sales tax.
7
. Recorded wage expense of $35,000. The cash paid was $25,000; the difference was due to various amounts withheld.
8
. Recorded employer’s payroll taxes.
9
. Accrued accumulated vacation pay.
1
0. Recorded an asset retirement obligation.
1
1. Recorded bonuses due to employees.
1
2. Recorded a contingent loss on a lawsuit that the company will probably lose.
1
3. Accrued warranty expense (assume expense warranty approach).
1
4. Paid warranty costs that were accrued in item 13 above.
1
5. Recorded sales of product and related warranties (assume sales warranty approach).
1
6. Paid warranty costs under contracts from item 15 above.
1
7. Recognized warranty revenue (see item 15 above).
1
8. Recorded estimated liability for premium claims outstanding.
Instructions

S
et up a table using the format shown below and analyze the effect of the 18 transactions on the financial statement categories indicated. # Assets Liabilities Owners’ Equity Net Income
U
se the following code:
I: Increase D: Decrease NE: No net effect

E13-
17 (Ratio Computations and Discussion) Sprague Company has been operating for several years, and on December 31, 2014, presented the following balance sheet.
he net income for 2014 was $25,000. Assume that total assets are the same in 2013 and 2014.
Instructions

C
ompute each of the following ratios. For each of the four, indicate the manner in which it is computed and its significance as a tool in the analysis of the financial soundness of the company.
(
a) Current ratio. (c) Debt to assets.
(
b) Acid-test ratio. (d) Return on assets.

E13-
18 (Ratio Computations and Analysis) Prior Company’s condensed financial statements provide the following information.
SPRAGUE COMPANY
BALANCE SHEET
DECEMBER 31, 2014
C
ash $ 40,000 Accounts payable $ 80,000
Receivables 75,000 Mortgage payable 140,000
Inventory 95,000 Common stock ($1 par) 150,000
Plant assets (net) 220,000 Retained earnings 60,000 $430,000 $430,000
Instructions

(
a)
Determine the following for 2014.
(
1) Current ratio at December 31.
(
2) Acid-test ratio at December 31.
(
3) Accounts receivable turnover.
(
4) Inventory turnover.
(
5) Return on assets.
(
6) Profit margin on sales.
(
b) Prepare a brief evaluation of the financial condition of Prior Company and of the adequacy of its profits.
P
RIOR COMPANY
BALANCE SHEET
D
ec. 31, 2014 Dec. 31, 2013
Cash $ 52,000 $ 60,000
Accounts receivable (net) 198,000 80,000
Short-term investments 80,000 40,000
Inventory 440,000 360,000
Prepaid expenses 3,000 7,000
Total current assets $ 773,000 $ 547,000
Property, plant, and equipment (net) 857,000 853,000
Total assets $1,630,000 $1,400,000
Current liabilities 240,000 160,000
Bonds payable 400,000 400,000
Common stockholders’ equity 990,000 840,000
Total liabilities and stockholders’ equity $1,630,000 $1,400,000
I
NCOME STATEMENT
FOR THE YEAR ENDED 2014
S
ales revenue $1,640,000
Cost of goods sold (800,000)
Gross profi t 840,000
Selling and administrative expenses (440,000)
Interest expense (40,000)
Net income $ 360,000
Instructions
(
a)
Compute the following ratios or relationships of Carver Inc. Assume that the ending account balances are representative unless the information provided indicates differently.
(
1) Current ratio.
(
2) Inventory turnover.
(
3) Accounts receivable turnover.
(
4) Earnings per share.
(
5) Profit margin on sales.
(
6) Return on assets on December 31, 2014.
(
b) Indicate for each of the following transactions whether the transaction would improve, weaken, or have no effect on the current ratio of Carver Inc. at December 31, 2014.
(
1) Write off an uncollectible account receivable, $2,200.
(
2) Purchase additional capital stock for cash.
(
3) Pay $40,000 on notes payable (short-term).
(
4) Collect $23,000 on accounts receivable.
(
5) Buy equipment on account.
(
6) Give an existing creditor a short-term note in settlement of account.

E13-
19 (Ratio Computations and Effect of Transactions) Presented below is information related to
Carver Inc.
C
ARVER INC.
BALANCE SHEET
DECEMBER 31, 2014
C
ash $ 45,000 Notes payable (short-term) $ 50,000
Receivables $110,000 Accounts payable 32,000
Less: Allowance 15,000 95,000 Accrued liabilities 5,000
Inventory 170,000 Common stock (par $5) 260,000
Prepaid insurance 8,000 Retained earnings 141,000
Land 20,000
Equipment (net) 150,000 $488,000 $488,000
ARVER INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2014
S
ales revenue $1,400,000
Cost of goods sold
Inventory, Jan. 1, 2014 $200,000
Purchases 790,000
Cost of goods available for sale 990,000
Inventory, Dec. 31, 2014 (170,000)
Cost of goods sold 820,000
Gross profi t on sales 580,000
Operating expenses 170,000
Net income $ 410,000
S
ee the book’s companion website, at www.wiley.com/college/kieso, for an additional set of exercises.





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