02PEF_1301059872_Oliviane Wenno

QUESTIONS

1. Jill Loomis believes a current liability is a debt that can be expected to be

paid in one year. Is Jill correct? Explain!
Yes, because company will pay its debts within one year or the operating cycle,
whichever is longer.
5. What is liquidity? What are two measures of liquidity?
Liquidity is ability to pay maturing obligations and meet unexpected needs for
cash.
There are two measures of liquidity; those are current assets and current liability.
Both of them are critical points that will determine current ratio (comparison) and
working capital (rest).
6. What is contingent liability? Give an example of a contingent liability that is
ussually recorded in the accounts!
A contingent liability is a potential liability. It depends on a future event occurring
or not occurring. For example, if a company is sued by a former employee for
$500,000 for age discrimination, the company has a contingent liability. If the
company is found guilty, it will have a liability. However, if the company is not
found guilty, the company will not have an actual liability.
7. Under what circumtances is a contingent liability disclosed only in the
notes to the financial statements?
Under what circumstances is a contingent liability not recorded in the
accounts nor disclosed in the notes to the financial statements?
Contingent liability will be disclosed only in the notes to the financial statements if
its circumstance is reasonably possible. Whereas contingent liability will not be
recorded in the accounts nor disclosed in the notes to the financial statements if
the circumstance is remote
8. What is the difference between gross pay and net pay? Which amount
should a company record as wages or salaries expense?
Gross pay is what you make before any deductions. If a job is advertized at
$100,000 a year, then that's the gross pay. Net pay is what's left after taxes,
health benefits and other deductions are taken out of your check. So gross pay of
$100,000 would become something like net pay of $95,000.
The one that should be record as Salaries or Wage expense is Gross Pay.

E11-4
 02PEF_1301059872_Oliviane Wenno

Guyer Company publishes a monthly sportz magazine, Fishing Preview.

Subscriptions to the magazine cost $20 per year. During November 2010, Guyer
sells 12,000 subscriptions beginning with the December issue. Guyer prepares
financial statements quarterly and recognizes subscription revenue earned at the
end of the quarter. The company uses the accounts Unearned Subscriptions and
Subscription Revenue.
Instructions:
a. Prepare the entry in November for the receipt of the subscriptions!
b. Prepare the adjusting entry at December 31, 2010, to record subscription
revenue earned in December 2010.
c. Prepare the adjusting entry at March 31, 2011, to record subscription
revenue earned in the first quarter of 2011.
GUYER COMPANY
General Journal

Re
Date Account Titles f Debit Credit
$
Nov Cash 240,000
Unearned Subscription 240,000
Adjusting Entries
Dec
31st Unearned Subscription 20,000
Subscription Revenue 20,000
Mar
31st Unearned Subscription 60,000
$
Subscription Revenue 60,000

E11-6
Brad Hoey Co. is involved in a lawsuit as a result of an accident that took place
September 5, 2010. The lawsuit was filed on November 1, 2010, and claims
damages of $1,000,000.
Instructions:
a. At December 31, 2010, Brad Hoet’s attorneys feel is remote that Brad Hoey
will lose the lawsuit. How should the company account for the effects of
the lawsuit?
Because it’s unlikely to occur, it doesn’t need to be recorded just ignore it (No
Entry)
 02PEF_1301059872_Oliviane Wenno

b. Assume instead that at December 31, 2010, Brad Hoey’s attorneys feel it is
probable that Brad Hoey will lose the lawsuit, and be required to pay
$1,000,000. How should the company account for this lawsuit?
Because they’re sure that the lawsuit is probable (likely to occur) therefore it
should be recorded in the accounts. Lawsuit expense is debited and then
estimated lawsuit liability is credited on $ 1,000,000
c. Assume instead that at December 31, 2010, Brad Hoey’s attorneys feel it is
reasonably possible that Brad Hoey Could lose the lawsuit, and be required
to pay $1,000,000. How should the company account for this lawsuit?
Because it’s reasonably possible (could happen, fifty-fifty), it just needs to be
disclosed only in the notes that accompany the financial statement

E11-7
Jewett Online Company has the following liability accounts after posting
adjusting entries: Accounts Payable $63,000, Unearned Ticket Revenue $24,000,
Estimated Warranty Liability $18,000, Interest Payable $8,000, Mortgage Payable
$120,000, Notes Payable $80,000, and Sales Taxes Payable $10,000. Assume the
company’s operating cycle is less than 1 year, ticket revenue will be earned
within 1 year, warranty costs are expected to be incurred within 1 year, and the
notes mature in 3 years.
Instructions:
a. Prepare the current liabilities section of the balance sheet, assuming
$30,000 of the mortgage is payable next year!
JEWETT ONLINE COMPANY
Balance Sheet

Current Liabilities
Account Payable $ 63,000
Unearned Ticket Revenue 24,000
Estimated Warranty Liability 18,000
Interest Payable 8,000
Long-Term Debt Due within One
Year 30,000
Sales Tax Payable 10,000
Total Current Liabilities 153,000
Non-Current Liabilities
Notes Payable 80,000
Mortgage Payable 90,000
$ 170,000
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b. Comment on Jewett Online Company’s liquidity, assuming total current

assets are $300,000!
Current Ratio = Current Assets : Current Liabilities = 300,000 : 153,000 = 1.96 : 1
Working Capital = Current Assets – Current Liabilities
= 300,000 – 153,000 = 147,000
Based on working capital and current ratio, Jewett Online Company has a good
liquidity because its current assets is almost twice more than current liabilities.

P11-1A
On January 1, 2010, the ledger of Mane Company contains the following liability
accounts.
Accounts Payable $52,000
Sales Taxes Payable $ 7,700
Unearned Service Revenue $16,000
During January the following selected transactions occurred:
Jan 5 Sold merchandise for cash totaling $22,680, which includes 8% sales
taxes.
12 Provided services for customers who had made advance payments of
$10,000. (Credit Service Revenue.)
14 Paid state revenue department for sales taxes collected in December
2009 ($7,700).
20 Sold 800 units of a new product on credit at $50 per unit, plus 8% sales
tax. This new product is subject to a 1-year warranty.
21 Borrowed $18,000 from UCLA Bank on a 3-month, 8%, $18,000 note.
25 Sold merchandise for cash totaling $12,420, which includes 8% sales
taxes.
Instructions:
a. Journalize the January transactions!
MANE COMPANY
General Journal
January, 31st 2010

Re
Date Account Titles f Debit Credit
22,68
Jan 5th Cash 0
Sales 20865.6
Sales Tax Payable 1814.4
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10,00
Jan 12 th
Cash 0
Credit Service Revenue 10,000
Jan 14th Sales Tax Payable 7,700
Cash 7,700
43,20
Jan 20th Cash 0
Sales 40,000
Sales Tax Payable 3,200
18,00
Jan 21st Cash 0
Notes Payable 18,000
12,42
Jan 25th Cash 0
Sales 11426.4
Sales Tax Payable 993.6

b. Journalize the adjusting entries at January 31 for (1) the outstanding notes
payable, and (2) estimated warranty liability, assuming warranty costs are
expected to equal 7% of sales of the new product. (Hint: Use one-third of a
month for the UCLA Bank note.)
MANE COMPANY
Adjusting Journal
January, 31st 2010

Re Debi Credi
Date Account Titles f t t
Jan 31st Interest Expense 40
Interest Payable 40
Jan 31st Warranty Expense 2800
Estimated Warranty Liability 2800

c. Prepare the current liabilities section of the balance sheet at January 31,
2010. Assume no change in accounts payable.

MANE COMPANY
Balance Sheet

Current Liabilities
Account Payable $ 52,00
 02PEF_1301059872_Oliviane Wenno

0
10,00
Unearned Service Revenue 0
18,00
Notes Payable 0
Sales Tax Payable 6,008
Estimated Warranty Liability 2,800
Interest Payable 40
88,84
Total Current Liabilities $ 8