2201 Financial Accounting
Practice Problem Set (3nd edition)
based on Larry Walther, Financial Accounting, with additional other practice material
Chapter 12 – Current liabilities and employer obligations
Problem 12.1 Structuring current liabilities
Server Planet operates a web hosting company. Examine the following items and prepare the current
liability section of the company’s December 31, 20X7, balance sheet.
1. The beginning of year accounts payable was $100,000. Purchases on trade accounts during the
year were $650,000, and payments on account were $610,000.
2. The company incurs substantial costs for electricity to run its servers and air conditioning
systems. As of December 31, 20X7, it is estimated that $55,000 of electricity has been used,
although the monthly billing for December has not yet been received.
3. Server Planet sells web hosting plans for as low as $25 per month. However, it requires its
customers to prepay in 6-month increments. As of the end of the year, $375,000 had been
collected for 20X8 web hosting plans.
4. Web hosting services are subject to sales taxes, and Server Planet collected $65,000 during the
year. All of these amounts have been remitted to taxing authorities, with the exception of
$5,000 that is due to be paid in January, 20X8.
5. The company has total bank loans of $1,500,000. This debt bears interest at 6%, payable
monthly. As of December 31, 20X7, all interest had been paid, with the exception of accrued
interest for the last half of December.
6. The company’s bank loans ($1,500,000) are all due on June 30, 20X8. However, Server Planet
has a firm lending agreement with the bank to renew and extend $1,000,000 of this amount on
a 5-year basis. The company intends to exercise this renewal option, but is not yet sure about
the final disposition of the remainder.
Liabilities Items Total
Current Liabilities
1. $
2.
3.
4.
5.
6.
Total Current Liabilities $
Supporting calculations:
1
Problem 12.2 Notes payable
October 1, 20X4, Farmer Engineering Services purchased a new laser surveying instrument. Farmer
paid $5,000 down and executed the following promissory note:
Prepare the appropriate journal entries to record …
a) … the purchase on October 1, 20X4.
b) … the year-end interest accrual on December 31, 20X4.
c) … the payment of the note and accrued interest on September 30, 20X5.
10-1-20X4
Purchase of laser equipment
12-31-20X4
Year-end interest accrual
09-30-20X5
Payment of note and interest at maturity
Problem 12.3 Contingent liabilities: Warranty
Riseva Corporation manufactures and sells lighting systems, which include a complex dimmer
module. About 10% of all units sold require subsequent repair under warranty. The average repair cost
is $80 per unit. Riseva began the year 20X2 with an accrued warranty liability of $250,000. During
20X2, 50,000 lighting systems were sold. $310,000 was expended on warranty services performed
during the year.
a) Prepare Riseva’s journal entries to accrue additional warranty costs relating to the sales in
20X2 and to account for what was spent on actual warranty work performed during the year.
Supporting calculations:
2
31.12.20X2
To record additional warranty cost as a
contingent liability
various
To record spending on warranty work
b) How much will appear as warranty expense in the 20X2 income statement,
and how much will appear as the warranty liability on the balance sheet?
Warranty expense reported in 20X2 income statement:
Warranty liability reported in 20X2 balance sheet:
Problem 12.4 Special forms of promissory notes
On April 1, 20X7, Miller Oil Company purchased a pumping truck. The only consideration was a
$100,000 note due in one year. This amount includes interest of $12,000. If Miller had purchased the
truck for cash, the purchase price would have been only $88,000.
Prepare the appropriate journal entries to record …
a) … the purchase on April 1, 20X7.
b) … the year-end discount amortization on Dec 31, 20X7.
c) … the payment of the note on Mar 31, 20X8.
Apr 1, 20X7
Purchase of pumping truck
Dec 31, 20X7
Year-end discount amortization
Mar 31, 20X8
Payment of note at maturity
d) What was the actual rate of interest per annum (commonly abbreviated p.a.) on this loan?