SOLUTIONS TO CHAPTER 11 RECOM.PROBLEMS
BRIEF EXERCISE 11-1
(a)A note payable due in two years is a long-term liability, not a current
liability.
(b)$30,000 of the mortgage payable is a current maturity of long-term debt. This amount should be reported as a current liability.
(c)Interest payable is a current liability because it will be paid out of current assets in the near future.
(d)Accounts payable is a current liability because it will be paid out of current assets in the near future.
BRIEF EXERCISE 11-2
July1Cash...... 80,000
Notes Payable...... 80,000
Dec.31Interest Expense...... 4,000
Interest Payable
($80,000 X 10% X 1/2).....4,000
BRIEF EXERCISE 11-4
Cash...... 720,000
Unearned Ticket Revenue...... 720,000
(To record sale of 4,000 season tickets)
Unearned Ticket Revenue...... 60,000
Ticket Revenue...... 60,000
(To record basketball ticket revenues earned)
BRIEF EXERCISE 11-5
(a)Working capital = $4,594,772 – $1,717,728 = $2,877,044 (thousand)
(b)Current ratio = $4,594,772 ÷ $1,717,728 = 2.67:1
BRIEF EXERCISE 11-6
Dec.31Warranty Expense...... 4,000
Warranty Liability...... 4,000
[(1,000 X 5%) X $80]
EXERCISE 11-1
July 1, 2012
Cash...... 50,000
Notes Payable...... 50,000
November 1, 2012
Cash...... 60,000
Notes Payable...... 60,000
December 31, 2012
Interest Expense
($50,000 X 12% X 6/12)...... 3,000
Interest Payable...... 3,000
Interest Expense
($60,000 X 10% X 2/12)...... 1,000
Interest Payable...... 1,000
Feburary 1, 2013
Notes Payable...... 60,000
Interest Payable...... 1,000
Interest Expense...... 500
Cash...... 61,500
April 1, 2013
Notes Payable...... 50,000
Interest Payable...... 3,000
Interest Expense...... 1,500
Cash...... 54,500
EXERCISE 11-2
(a)June 1Cash...... 90,000
Notes Payable...... 90,000
(b)June 30Interest Expense...... 900
Interest Payable
[($90,000 X 12%) X 1/12] 900
(c)Dec. 1Notes Payable...... 90,000
Interest Payable
($90,000 X 12% X 6/12)....5,400
Cash...... 95,400
(d)$5,400
EXERCISE 11-4
(a)Nov.30Cash...... 240,000
Unearned Subscription Revenue
(12,000 X $20)...... 240,000
(b)Dec.31Unearned Subscription Revenue...... 20,000
Subscription Revenue
($240,000 X 1/12).....20,000
(c)Mar.31Unearned Subscription Revenue...... 60,000
Subscription Revenue
($240,000 X 3/12)...... 60,000
EXERCISE 11-5
(a)Estimated warranties outstanding:
Month / Estimate / Units Defective / OutstandingNovember
December
Total / 900
960
1,860 / 600
400
1,000 / 300
560
860
Estimated warranty liability—860 X $20 = $17,200.
(b)Warranty Expense (1,860 X $20)...... 37,200
Warranty Liability...... 37,200
Warranty Liability...... 20,000
Repair Parts...... 20,000
(c)Warranty Liability (500 X $20)...... 10,000
Repair Parts...... 10,000
EXERCISE 11-6
(a)If a contingency is remote (unlikely to occur), it need not be recorded or disclosed.
(b)Since the contingency is probable and reasonably estimable, the liability should be recorded in the accounts. In addition, the details should be disclosed in the notes to the financial statements. The journal entry is:
Lawsuit Loss...... 1,000,000
Lawsuit Liability...... 1,000,000
(c)If a contingency is reasonably possible, it need not be recorded, but must be disclosed in the notes to the financial statements.
EXERCISE 11-7
(a)WARWICK ONLINE COMPANY
Partial Balance Sheet
Current liabilities
Accounts payable...... $63,000
Mortgage payable...... 30,000
Unearned ticket revenue...... 24,000
Warranty liability...... 18,000
Sales taxes payable...... 10,000
Interest payable...... 8,000
Total current liabilities...... $153,000
(b)Warwick Online Company’s working capital is $147,000 and its current ratio is 1.96:1. Although a current ratio of 2:1 has been considered the standard for a good credit rating, many companies operate successfully with a current ratio below 2:1.
EXERCISE 11-8
(a)Working capital = $7,450 – $7,714 = ($264) million
(b)Current ratio = $7,450 ÷ $7,714 = .97:1