Chapter 10 - Reporting and Interpreting Liabilities

Chapter 10
Reporting and Interpreting Liabilities
ANSWERS TO MINI-EXERCISES M101
Assets (a) (b)
Cash + 375,000

Liabilities
Unearned Revenue + 375,000 Unearned Revenue - 75,000

Stockholders Equity

Performance Revenue (+R) +75,000

(a) Before the first show: dr Cash (+A) (1,500 x $250)...................................... cr Unearned Revenue (+L).................................. (b) After the first show: dr Unearned Revenue (-L) ($375,000 x 1/5 shows). . cr Performance Revenue (+R, +SE)................... M102
Assets
Cash Inventory + 5,200 - 3,000

375,000 375,000 75,000 75,000

Liabilities
Sales Tax Payable + 200

Stockholders Equity
Sales Revenue (+R) +5,000 CGS (+E) -3,000

dr Cash (+A).................................................................... cr Sales Tax Payable (+L) ($5,000 x 4%)................... cr Sales (+R, +SE)....................................................... dr CGS (+E, -SE)............................................................. cr Inventory (-A)........................................................... M103 Gross salaries & wages Employee income tax withheld Employee FICA withheld Net Pay $100,000 (14,000) ( 5,250) $ 80,750

5,200 200 5,000 3,000 3,000

Total payroll costs would include the gross pay ($100,000) as well as the additional employer payroll taxes ($5,250 FICA) and unemployment taxes ($500). In total,
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Chapter 10 - Reporting and Interpreting Liabilities

Lightning Electric would report $105,750 as the total payroll cost for this pay period. M104 dr Salaries and Wages Expense (+E, -SE)..................... cr Withheld Income Taxes Payable (+L)...................... cr FICA Payable (+L)................................................... cr Cash (-A).................................................................. dr Payroll Tax Expense (+E, -SE)................................... cr FICA Payable (+L).................................................... cr Unemployment Taxes Payable (+L)........................ M109
The bonds could be reported on the balance sheet using one of two alternative formats: (1) show the discount being subtracted from the face value, as follows: Long-term Liabilities Bonds Payable Discount on Bonds Payable Carrying Value or (2) show only the net amount, as follows: Long-term Liabilities Bonds Payable, Net $490,000 $500,000 (10,000) 490,000

100,000 14,000 5,250 80,750 5,750 5,250 500

Note: The discount is calculated as the excess of the face value ($500,000) over the issue price ($490,000 = 98% x $500,000).

M1010
The bonds could be reported on the balance sheet using one of two alternative formats: (1) show the premium being added to the face value, as follows: Long-term Liabilities Bonds Payable Premium on Bonds Payable Carrying Value or (2) show only the net amount, as follows: Long-term Liabilities Bonds Payable, Net $515,000 $500,000 15,000 515,000

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Note: The premium is calculated as the excess of the issue price ($515,000 = 103% x $500,000) over the face value ($500,000).

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Chapter 10 - Reporting and Interpreting Liabilities

M1015

a. Decrease b. Increase

$600,000 $500,000 + $20,000 $600,000 $50,000 $500,000 $50,000 $600,000 + $0 $500,000 + $100,000 $600,000 + $250,000 $500,000 + $250,000

= =

1.15 1.22

c. Decrease

1.00

d. Decrease

1.13

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Chapter 10 - Reporting and Interpreting Liabilities

ANSWERS TO SKILLS DEVELOPMENT CASES S104 All investors should assess the risk and return associated with any investment before they spend their money. The characteristics of bonds are explained in the bond documents. As a result, investors should have a clear understanding of a bond before it is purchased. Bonds with a call feature provide somewhat higher risk for investors but they are often compensated with a slightly higher interest rate. Given that call features are described in the bond documents, it is difficult to argue that it is unethical for a company to exercise a call option. Most people conclude that this is a situation where the buyer of a bond has an obligation to read the bond documents. Some people will argue, however, that it may not be reasonable to expect that an elderly person has the skill necessary to interpret a complex legal document. Most people conclude that the use of the call option is ethical but that corporations have an obligation to provide understandable information to investors.

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