Liability Classification Chapter 8

Listed below are selected items from the financial statements of a company for the year ended December 31, Year 1.

Salaries Payable 63,000
Accounts payable 35,000
Current Maturity of Long-Term Debt 25,000
Bonds payable, due December 31, Year 20 2,200,000
Premium on Bonds Payable 14,000
Estimated Warranty Liability 10,000
Note Payable, due Dec. 31, Year 4 75,000
Unearned Revenue 25,000
Note Payable, due June 1, Year 2 8,000
Discount on Note Payable due June 1, Year 2 500
  1. Determine the Total Current Liabilities to be on a classified balance sheet at December 31, Year 1.
  2. Determine the Total Long-Term Liabilities to be reported on a classified balance sheet at December 31, Year 1.
  1. Total Current Liabilities - 165,500
  2. Total Long-Term Liabilities - 2,289,000

The Effect of Bad Debt Expense Chapter 8

Determine the effect on a company’s Assets and net Income from the following transaction: bad debt expense is recorded by a company using the allowance method to account for bad debts.

Assets Net Income
A Decreased Decreased
B Decreased No effect
C Increased No effect
D Increased Increased
F None of the above

Calculating Bad Debts Chapter 8

A company began the year with Accounts Receivable of $250,000 and a balance in Allowance for Doubtful Accounts of $11,000 (cr.). During the year, the company had credit sales of $540,000, collections on Accounts Receivable of $600,000 and wrote off $9,000 for accounts specifically identified as uncollectible. Additionally, the company collected on $2,500 of accounts previously written off during the year.

Past experience indicates that 2% of credit sales will become uncollectible.

  1. What is the ending balance in the Accounts Receivable account?
  2. What is the ending balance in the Allowance for Doubtful account after adjustment?
  1. Ending Accounts Receivable balance - 181,000
  2. Ending Allowance for Doubtful balance - 15,300

Contingent Liabilities Chapter 8

A company estimates the cost of products warranties to be 3% of sales. The beginning balance in Estimated Warranty Liability account is $15,000. Sales for the period was $795,000. During the period, $32,600 was actually paid for warranty related costs. What is the ending balance in the Warranty Liability account?

  1. $6,250
  2. $23,850
  3. $23,750
  4. $17,600
  5. $38,850

Contingent Liabilities - Warranties Chapter 8

A company provides a warranty on its products that it sells to customers. The warranty liability account had $1,200 balance on April 1. The company had sales of $67,000 in April and estimated warranty repairs at 3% of sales. During the month, the company actually paid out $2,400 for warranty repairs.

Determine the April 30 balance in the estimated warranty liability account.

The ending balance is $810.

The Effect of Uncollectible Accounts Chapter 8

Under the allowance method of recognizing uncollectible accounts, the entry to write off an uncollectible account has what effect on the following accounts (indicate Increase, Decrease, or No Effect)

  1. Allowance for Doubtful Accounts
  2. Net Income
  3. Net Realizable Value of Accounts Receivable
  1. Allowance for Doubtful Accounts - Decrease
  2. Net Income - No Effect
  3. Net Realizable Value of Accounts Receivable - No Effect

Using the Balance Sheet Method Chapter 8

At December 31, a company has the following balances:

Accounts Receivable 35,000 Credit Sales 60,000
Allowance for Doubtful Accounts 500 (credit) Cash 5,400

The company uses the balance sheet method to estimate bad debt. Management determined the estimate to be 3%. Under these circumstance, record the year-end adjusting entry for bad debt expense.

Journal Entry 1
Bad Debt Expense 550
Allowance for Doubtful Accounts 550