1. Current Liability
What is a current liability? From the perspective of a user of financial statements, why do you believe current liabilities are separated from long-term liabilities? Based on your current experience as well as and any additional research you may have done provide two examples of situations where businesses collect monies from customers and employees and report these amounts as a current liability.
2. Client Recommendations
A client comes to you thinking about starting a consulting business. Your client is specifically interested in what type of entity should be created for this new business. Based on your readings or any additional research you may have done, discuss the advantages and disadvantages of the following: sole proprietorship, partnership, and corporation. Based on these advantages and disadvantages provide a clear recommendation to your client.
3. Future Obligations Journal
The current liability section of the balance sheet lists the liabilities that are due within the next 12 months. Reflecting on your current financial situation, apply the concept of current liabilities. What does this analysis tell you about your future obligations? What did you learn from this experience?
Week Four Exercise Assignment
1. Prepayments by customers. Greenland Enterprises began a new magazine in the fourth quarter of 19X2. Annual subscriptions, which cost $18 each, were sold as follows:
If subscriptions begin (and magazines are sent) in the month of sale:
a. Present the necessary journal entry to record the magazine subscriptions sold during the fourth quarter.
b. Determine how much subscription revenue Greenland earned by the end of 19X2.
c. Compute Greenland’s liability to subscribers at the end of 19X2.
2. Notes payable. Sentry Security Systems purchased $72,000 of office equipment on April 1, 19X3, by signing a three-year, 12% note payable to Sharp, Inc. One-third of the principal, along with interest on the outstanding balance, is payable each April 1 until maturity. (The first payment is due in 19X4.)
a. Fill in the following table to reflect Sentry’s liabilities, assuming a March 31 year-end.
19X4 19X5 19X6
Current portion of long-term debt 24,000 24, 000 24,000
Interest payable 8,640 5,760 2,880
Long-term debt 48,000 24,000
b. Assuming that interest is properly recorded at the end of each year, present the proper journal entry to record the last payment on April 1, 19X6.
3. Notes payable. Red Bank Enterprises was involved in the following transactions during the fiscal year ended October 31:
Aug. 2 Borrowed $75,000 from the Bank of Kingsville by signing a 120-day note for $79,000.
20 Issued a $40,000 note to Harris Motors for the purchase of a $40,000 delivery truck. The note is due in 180 days and carries a 12% interest rate.
Sept. 10 Purchased merchandise from Pans Enterprises in the amount of $15,000. Issued a 30-day, 12% note in settlement of the balance owed.
11 Issued a $60,000 note to Datatex Equipment in settlement of an overdue account payable of the same amount. The note is due in 30 days and carries a 14% interest rate.
Oct. 10 The note to Paris Enterprises was paid in full.
11 The note to Datatex Equipment was due today, but insufficient funds were available for payment. Management authorized the issuance of a new 20-day, 18% note for $60,700, the maturity value of the original obligation.
31 The new note to Datatex Equipment was paid in full.
a. Prepare journal entries to record the transactions.
b. Prepare adjusting entries on October 31 to record accrued interest.
c. Prepare the current liability section of Red Bank’s balance sheet as of October 31.
Assume the Accounts Payable account totals $203,600 on this date.
4. Partner investments; journal entries. The LP partnership was formed on January 1, 19X7, by investments from Bill Levy and Marv Parcells. Levy contributed $30,000 cash and $80,000 of land. Parcells contributed various assets from a business that he had operated over the past five years. A balance sheet from that business disclosed the following:
Accounts receivable $ 27,000
Allowance for uncollectibles (3,200)
Accumulated depreciation (24,000)
The partners confirmed that the allowance for uncollectible accounts should be decreased by $600. In addition, an independent appraisal determined that fair market values of the land and equipment on January 1 were $125,000 and $35,000, respectively.
Prepare the journal entries needed to record the investments of Levy and Parcells.
5. Income distribution: Different arrangements. Frank, Gatti, and Hogan recently invested 530,000 each and formed the Apex partnership. During the first year of operation, the business generated a net income of $39,000. Determine the proper division of income among the partners for the following independent cases:
a. Income is divided on the basis of a ratio of the beginning capital investments.
b. Partners are allowed 12% interest on their investments; the remaining profits and losses are allocated on a 6 :1 :3 basis.
c. Frank and Hogan each receive salary allowances of $24,000 per year; the remaining profits and losses are shared equally.
6. Investment by partners; financial statements. Abram, Haas, and Tidwell formed a partnership to practice law by combining their respective sole proprietorships. The assets and liabilities contributed to the firm on January 2, 19X4, the date of formation, follow.
Book Value Fair Market Value
Land $40,000 $115,000
Mortgage payable 38,000 38,000
Office supplies 42,000 30,000
Office equipment 64,000 48,000
Cash 50,000 50,000
Accounts receivable 20,000 18,000
Short-term investments 4,000 7,000
a. Prepare journal entries to record the investments of Abram, Haas Tidwell in the new partnership.
b. Prepare a classified balance sheet for the partnership immediately after the investments are recorded.
c. The partners share profits and losses equally, and the first year’s n income was $66,000. Cash withdrawals of $5,000 were made by Abram,$22,000 by Haas, and $17,000 by Tidwell. Prepare the December 31 19X4, statement of partners’ equity for the firm