CHAPTER 8

Current Liabilities

Determine proper classification of liabilities (LO1)

E81 Match (by letter) the correct reporting method for each of the items listed below.
Reporting Method
C = Current liability
L = Long-term liability
D = Disclosure note only
N = Not reported
Item
_______ 1. Accounts payable.
_______ 2. Customer advances.
_______ 3. Commercial paper.
_______ 4. Unused line of credit.
_______ 5. A contingent liability that is probable of occurring within the next year and can be
estimated.
_______ 6. A contingent liability that is reasonably possible of occurring within the next year
and can be estimated.
_______ 7. Notes payable due in two years.
_______ 8. Current portion of long-term debt.
_______ 9. Sales tax collected from customers.
_______ 10. Notes payable due in two years.

Record notes payable (LO2)

E82 On December 1, 2012, Aviation Training Corp. borrows $60,000 cash from Community
Savings and Loan. Aviation Training signs a three-month, 10% note payable. Interest is payable
at maturity. Aviations year-end is December 31.
Required:
1. Record the note payable by Aviation Training.
2. Record the appropriate adjusting entry for the note by Aviation Training on December 31,
2012.
3. Record the payment of the note at maturity.

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Record notes payable (LO2)
E83 On September 1, 2012, Trico Technologies, an aeronautic electronics company, borrows
$10 million cash to expand operations. The loan is made by FirstBanc Corp. under a short-term
line of credit arrangement. Trico signs a six-month, 6% promissory note. Interest is payable at
maturity. Tricos year-end is December 31.
Required:
1. Record the issuance of the note by Trico Technologies.
2. Record the appropriate adjusting entry for the note by Trico on December 31, 2012.
3. Record the payment of the note by Trico at maturity.

Record notes receivable (LO2)

E84 On September 1, 2012, Trico Technologies, an aeronautic electronics company, borrows
$10 million cash to expand operations. The loan is made by FirstBanc Corp. under a short-term
line of credit arrangement. Trico signs a six-month, 6% promissory note. Interest is payable at
maturity. FirstBanc Corp.s year-end is December 31.
Required:
1. Record the acceptance of the note by FirstBanc Corp.
2. Record the appropriate adjusting entry for the note by FirstBanc Corp., on December 31, 2012.
3. Record the receipt of cash by FirstBanc Corp. at maturity.

Determine interest expense (LO2)

E85 OS Environmental provides cost-effective solutions for managing regulatory requirements
and environmental needs specific to the airlines industry. Assume that on July 1, 2012, the
company issues a one-year note for the amount of $1 million. Interest is payable at maturity.
Required:
Determine the amount of interest expense that should be recorded in a year-end adjusting entry
under each of the following independent assumptions:
Interest Rate Fiscal Year-End
1.10% December 31
2. 8% September 30
3.6% October 31
4.4% January 31

Record a line of credit (LO2)

E86 The following selected transactions relate to liabilities of Rocky Mountain Adventures.
Rocky Mountains fiscal year ends on December 31.
Jan.13 Negotiate a revolving credit agreement with First Bank that can be renewed annually
upon bank approval. The amount available under the line of credit is $5 million at the
banks prime rate.
Feb. 1 Arrange a three-month bank loan of $2 million with First Bank under the line of credit
agreement. Interest at the prime rate of 6% is payable at maturity.
May 1 Pay the 6% note at maturity.
Required:
Record the appropriate entries, if any, on January 13, February 1, and May 1.

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Calculate payroll withholdings and payroll taxes (LO3)
E87 Aspen Ski Resorts has 10 employees, each working 40 hours per week and earning $20 an
hour. Although the company does not pay any health or retirement benefits, one of the perks of
working at Aspen is that employees are allowed free skiing on their days off. Federal income
taxes are withheld at 15% and state income taxes at 6%. FICA taxes are 7.65% of the first
$102,000 earned per employee and 1.45% thereafter. Unemployment taxes are 6.2% of the first
$7,000 earned per employee.
Required:
1. Compute the total salary expense, the total withholdings from employee salaries, and the
actual direct deposit of payroll for the first week of January.
2. Compute the total payroll tax expense Aspen Ski Resorts will pay for the first week of January
in addition to the total salary expense and employee withholdings calculated in Requirement 1.
3. How should Aspen Ski Resorts account for the free skiing given to employees on their days
off?

Record payroll (LO3)

E88 During January, Luxury Cruise Lines pays employee salaries of $1 million. Withholdings
in January are $76,500 for the employee portion of FICA, $150,000 for federal income tax,
$60,000 for state income tax, and $10,000 for the employee portion of health insurance (payable
to Blue Cross/Blue Shield). The company incurs an additional $62,000 for federal and state
unemployment tax and $30,000 for the employer portion of health insurance.
Required:
1. Record the employee salary expense, withholdings, and salaries payable.
2. Record the employer-provided fringe benefits.
3. Record the employer payroll taxes.

Record payroll (LO3)

E89 Airline Temporary Services (ATS) pays employees monthly. Payroll information is listed
below for January, the first month of ATSs fiscal year. Assume that none of the employees
exceeds the federal unemployment tax maximum salary of $7,000 in January.
Salaries $250,000
Federal income taxes withheld 37,500
State income taxes withheld 12,500
Federal unemployment tax rate 0.80%
State unemployment tax rate (after FUTA 5.40%
deduction)
Social Security (FICA) tax rate 7.65%
Required:
Record salaries expense and payroll tax expense for the January pay period.
Analyze and record unearned revenues (LO4)

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Record unearned revenue (LO4)
E810 Apple Inc. is the number one online music retailer through its iTunes music store. Apple
sells iTunes gift cards in $15, $25, and $50 increments. Assume Apple sells $10 million in
iTunes gift cards in December, and customers redeem $8 million of the gift cards.
Required:
1. Record the advance collection of $10 million for iTunes gift cards.
2. Record the revenue earned when the $8 million in gift cards are redeemed.

Record sales taxes (LO4)

E811 Two competing travel agencies provide similar services, but record sales using different
methods.
1. Eastern Travel records sales and sales taxes in separate accounts. For the month of January,
sales total $50,000, and sales taxes are $3,000.
2. Western Travel records sales and sales taxes together. For the month of January, sales total
$106,000, including a 6% sales tax.
Required:
Record sales and the related sales taxes for (1) Eastern Travel and (2) Western Travel.

Analyze and record a contingent liability (LO5)

E812 Top Sound International designs and sells high-end stereo equipment for auto and home
use. Engineers notified management in December 2012 of a circuit flaw in an amplifier that
poses a potential fire hazard. Further investigation indicates that a product recall is probable,
estimated to cost the company somewhere between $1 and $2 million. The fiscal year ends on
December 31.
Required:
1. Should this contingent liability be reported, disclosed in a note only, or neither? Explain.
2. What loss, if any, should Top Sound report in its 2012 income statement?
3. What liability, if any, should Top Sound report in its 2012 balance sheet?
4. What entry, if any, should be recorded?

Determine proper treatment of a contingent liability (LO5)

E813 Pacific Cruise Lines is a defendant in litigation involving a swimming accident on one of
its three cruise ships.
Required:
For each of the following scenarios, determine the appropriate way to report the situation.
Explain your reasoning and record any necessary entry.
1. The likelihood of a payment occurring is probable, and the estimated amount is $5 million.
2. The likelihood of a payment occurring is probable, and the amount is estimated to be in the
range of $4 to $6 million.
3. The likelihood of a payment occurring is reasonably possible, and the estimated amount is $5
million.
4. The likelihood of a payment occurring is remote, while the estimated potential amount is $5
million.

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Record warranties (LO5)
E814 Computer Wholesalers restores and resells notebook computers on eBay. It originally
acquires the notebook computers from corporations upgrading their computer systems, and it
backs each notebook it sells with a 90-day warranty against defects. Based on previous
experience, Computer Wholesalers expects warranty costs to be approximately 4% of sales. By
the end of the first year, sales and actual warranty expenditures are $800,000 and $22,000,
respectively.
Required:
1. Does this situation represent a contingent liability? Why or why not?
2. Record warranty expense and a contingent liability for the year based on 4% of sales.
3. Record the reduction in the contingent liability and the reduction in cash of $22,000 incurred
during the year.
4. What is the balance in the contingent liability account after entries in Requirements 2 and 3?

Analyze disclosure of contingent liabilities (LO5)

E815 Dow Chemical Company provides chemical, plastic, and agricultural products and
services to various consumer markets. The following excerpt is taken from the disclosure notes
of Dows annual report.
Dow Chemical
Notes to the Financial Statements (excerpt)
Dow Chemical had accrued obligations of $381 million for environmental remediation and
restoration costs, including $40 million for the remediation of Superfund sites. This is
managements best estimate of the costs for remediation and restoration with respect to
environmental matters for which the Company has accrued liabilities, although the ultimate
cost with respect to these particular matters could range up to twice that amount. Inherent
uncertainties exist in these estimates primarily due to unknown conditions, changing
governmental regulations and legal standards regarding liability, and evolving technologies
for handling site remediation and restoration.
Required:
1. Does the excerpt describe a contingent liability?
2. Under what conditions would Dow record such a contingency?
3. How did Dow record the $381 million?

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Calculate and analyze liquidity ratios (LO6)
E8-16 Selected financial data regarding current assets and current liabilities for Royal
Caribbean Cruises, Ltd. a leader in the cruise line industry, is provided:
($ in millions)
Current assets
Cash and cash equivalents $ 533
Current investments -
Net receivables 267
Inventory 127
Other current assets 145
Total current assets $ 1,072
Current liabilities
Accounts payable $ 962
Short-term debt 1,199
Other current liabilities 1,283
Total current liabilities $ 3,444
Required:
1. Calculate working capital, the current ratio, and the acid-test ratio for Royal Caribbean.
2. Compare your calculations with those for United Airlines and Southwest Airlines reported in
the chapter text. Which company appears more likely to have difficulty paying its currently
maturing debts?

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