In accordance with accounting for transfers and servicing, all
of the following would be disclosed except
(d) Answers (a), (b), and (c) are required disclosures.
Answer (d) is the correct answer as disclosure is only required of
assets and liabilities with nonestimable fair values.
Lyle, Inc. is preparing its financial statements for the year
ended December 31, year 2. Accounts payable amounted to
$360,000 before any necessary year-end adjustment related to
• At December 31, year 2, Lyle has a $50,000 debit balance
in its accounts payable to Ross, a supplier, resulting
from a $50,000 advance payment for goods to be manufactured
to Lyle’s specifications.
• Checks in the amount of $100,000 were written to vendors
and recorded on December 29, year 2. The checks
were mailed on January 5, year 3.
What amount should Lyle report as accounts payable in its December
31, year 2 balance sheet?
(a) Before adjustment, the balance in the Accounts
Payable account is $360,000. This amount is net of a $50,000
debit balance in Lyle’s account payable to Ross resulting from a
$50,000 advance payment for goods to be manufactured to Lyle’s
specifications. The $50,000 should be reclassified as a current
asset, Advance to Suppliers. The checks recorded on 12/29/Y2
incorrectly reduced the accounts payable balance by $100,000.
The $100,000 reduction should not have been recorded until the
checks were mailed on 1/5/Y3. The 12/31/Y2 accounts payable
must be increased by $100,000. Therefore, the corrected
12/31/Y2 accounts payable is $510,000.
Unadjusted AP $360,000
Reclassification of advance 50,000
Error correction 100,000
Rabb Co. records its purchases at gross amounts but wishes
to change to recording purchases net of purchase discounts.
Discounts available on purchases recorded from October 1, year
1, to September 30, year 2, totaled $2,000. Of this amount, $200
is still available in the accounts payable balance. The balances in
Rabb’s accounts as of and for the year ended September 30, year
2, before conversion are
Purchase discounts taken 800
Accounts payable 30,000
What is Rabb’s accounts payable balance as of September 30,
year 2, after the conversion?
(a) When purchases are recorded using the net method,
purchases and accounts payable are recorded at an amount net of
the cash discounts, and the failure to take advantage of a discount
is recorded in a Purchase Discounts Lost account. Therefore,
when Rabb changes to the net method, gross accounts payable
($30,000) must be adjusted down to the net amount. Since $200
of discounts are still available in the accounts payable balance, the
net accounts payable at 9/30/Y2 is $29,800 ($30,000 ??$200).
The journal entry is
Purchase discounts lost 1,000
Purchase discounts 800
Accts. payable 200
On March 1, year 1, Fine Co. borrowed $10,000 and signed
a two-year note bearing interest at 12% per annum compounded
annually. Interest is payable in full at maturity on February 28,
year 3. What amount should Fine report as a liability for accrued
interest at December 31, year 2?
(d) Accrued interest payable at 12/31/Y2 is interest
expense which has been incurred by 12/31/Y2, but has not yet
been paid by that date. The note was issued on 3/1/Y1 and interest
is payable in full at maturity on 2/28/Y3. Therefore, there
is one year and ten months of unpaid interest at 12/31/Y2
(3/1/Y1 to 12/31/Y2). Interest for the first year is $1,200
($10,000 × 12%). Since interest is compounded annually, the
new principal amount for the second year includes the original
principal ($10,000) plus the first year’s interest ($1,200).
Therefore, accrued interest for the ten months ended 12/31/Y2
is $1,120 ($11,200 × 12% × 10/12), and total accrued interest at
12/31/Y2 is $2,320 ($1,200 + $1,120).
On September 1, year 1, Brak Co. borrowed on a
$1,350,000 note payable from Federal Bank. The note bears
interest at 12% and is payable in three equal annual principal
payments of $450,000. On this date, the bank’s prime rate was
11%. The first annual payment for interest and principal was
made on September 1, year 2. At December 31, year 2, what
amount should Brak report as accrued interest payable?
(c) Accrued interest payable at 12/31/Y2 is interest
expense which has been incurred by 12/31/Y2, but has not yet
been paid by that date. Interest was last paid on 9/1/Y2; the
accrued interest payable includes interest expense incurred from
9/1/Y2 through 12/31/Y2 (four months). The original balance
of the note payable was $1,350,000 but the 9/1/Y2 principal
payment of $450,000 reduced this balance to $900,000. Therefore,
the interest payable at 12/31/Y2 is $36,000 ($900,000 ×
12% × 4/Y3). The prime rate (11%) does not affect the computation
because it is not the stated rate on this note.
Ames, Inc. has $500,000 of notes payable due June 15, year
3. Ames signed an agreement on December 1, year 2, to borrow
up to $500,000 to refinance the notes payable on a long-term
basis with no payments due until year 4. The financing agreement
stipulated that borrowings may not exceed 80% of the value
of the collateral Ames was providing. At the date of issuance of
the December 31, year 2 financial statements, the value of the
collateral was $600,000 and is not expected to fall below this
amount during year 3. In Ames’ December 31, year 2 balance
sheet, the obligation for these notes payable should be classified
(c) All of the notes are due 6/15/Y3, and normally the
entire amount would be classified as current. However, a shortterm
obligation can be reclassified as long-term if the enterprise
intends to refinance the obligation on a long-term basis and the
intent is supported by the ability to refinance. Ames demonstrated
its ability by entering into a financing agreement before
the statements are issued. The amount to be excluded from current
liabilities cannot exceed the amount available for refinancing
under the agreement. Ames expects to be able to refinance at
least $480,000 (80% × $600,000) of the notes. Therefore, that
amount can be classified as long-term, while the remaining
$20,000 must be classified as short-term.
Cali, Inc. had a $4,000,000 note payable due on March 15,
year 3. On January 28, year 3, before the issuance of its year 2
financial statements, Cali issued long-term bonds in the amount
of $4,500,000. Proceeds from the bonds were used to repay the
note when it came due. How should Cali classify the note in its
December 31, year 2 financial statements?
(c) The $4,000,000 note payable is due March 15, year
3 and normally would be classified as a current liability in the
December 31, year 2 financial statements. However, a short-term
obligation can be reclassified as long-term if the enterprise intends
to refinance the obligation on a long-term basis and the
intent is supported by the ability to refinance. Cali demonstrated
its ability to refinance by actually issuing bonds and refinancing
the note prior to the issuance of the December 31, year 2 financial
statements. Since the proceeds from the bonds exceeded the
amount needed to retire the note, the entire $4,000,000 notes
payable would be classified as a noncurrent liability, with separate
disclosure of the note refinancing.
On December 31, year 2, Largo, Inc. had a $750,000 note
payable outstanding, due July 31, year 3. Largo borrowed the
money to finance construction of a new plant. Largo planned to
refinance the note by issuing long-term bonds. Because Largo
temporarily had excess cash, it prepaid $250,000 of the note on
January 12, year 3. In February year 3, Largo completed a
$1,500,000 bond offering. Largo will use the bond offering proceeds
to repay the note payable at its maturity and to pay construction
costs during year 3. On March 3, year 3, Largo issued
its year 2 financial statements. What amount of the note payable
should Largo include in the current liabilities section of its December
31, year 2 balance sheet?
(c) The notes payable ($750,000) are due 7/31/Y3,
and would normally be included in 12/31/Y2 current liabilities.
However, a short-term obligation can be reclassified as long-term
if the enterprise intends to refinance the obligation on a longterm
basis and the intent is supported by the ability to refinance.
Largo demonstrated its ability to refinance by actually issuing
$1,500,000 of bonds in February year 3 before the 12/31/Y2
financial statements were issued on 3/3/Y3. The bond proceeds
will be used to retire the note at maturity. The amount excluded
from current liabilities cannot exceed the amount actually refinanced.
Since Largo prepaid $250,000 of the note on 1/12/Y3
with excess cash, that amount must be included in 12/31/Y2
current liabilities. Only the remaining $500,000 can be excluded
from current liabilities.
Lime Co.’s payroll for the month ended January 31, year 2,
is summarized as follows:
Total wages $10,000
Federal income tax withheld 1,200
All wages paid were subject to FICA. FICA tax rates were 7%
each for employee and employer. Lime remits payroll taxes on
the 15th of the following month. In its financial statements for
the month ended January 31, year 2, what amounts should Lime
report as total payroll tax liability and as payroll tax expense?
(d) Lime’s payroll tax liability includes amounts withheld
from payroll checks [$1,200 of federal income taxes with450
held and $700 of the employees’ share of FICA ($10,000 × 7%)]
plus the employer’s share of FICA (an additional $700).
Therefore, the total payroll tax liability is $2,600 ($1,200 + $700
+ $700). The amount recorded as payroll tax expense consists
only of the employer’s share of FICA ($700), since no unemployment
taxes are mentioned in the problem.
Under state law, Acme may pay 3% of eligible gross wages or
it may reimburse the state directly for actual unemployment
claims. Acme believes that actual unemployment claims will be
2% of eligible gross wages and has chosen to reimburse the state.
Eligible gross wages are defined as the first $10,000 of gross
wages paid to each employee. Acme had five employees, each of
whom earned $20,000 during year 2. In its December 31, year 2
balance sheet, what amount should Acme report as accrued liability
for unemployment claims?
(a) The contingent unemployment claims liability is
both probable and reasonably estimable, so it must be accrued at
12/31/Y2. Acme’s reasonable estimate of its probable liability is
2% of eligible gross wages. Eligible gross wages are the first
$10,000 of gross wages paid to each of the five employees (5 ×
$10,000 = $50,000), so the accrued liability should be $1,000
(2% × $50,000). Note that the 3% rate is not used because Acme
has chosen the option to reimburse the state directly, and its best
estimate of this liability is based on 2%, not 3%.