Question 1

Rudy Corporation is looking to purchase a building costing $500,000 by paying $100,000 cash on the purchase date, and agreeing to make annual payments for the next ten years. The first payment is due one year after the purchase date. Rudy's incremental borrowing rate is 10%. Each of the annual payments is closest to:

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Question 2

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. On the balance sheet as of the purchase date, after the initial $10,000 payment was made, the liability reported is closest to:

Accepted Answer

The liability reported on the balance sheet as of the purchase date after the initial $10,000 payment was made, can be calculated using the present value of an annuity formula.

PV Annuity = Payment per period × [1 − (1 + r)-n ÷ r]

Where:
Payment per period = $10,000
r = 10%
n = 10

PV Annuity = $10,000 × [1 − (1 + 0.10)-10 ÷ 0.10]
PV Annuity = $61,446 (rounded to nearest whole amount)

Therefore, the liability reported on the balance sheet is closest to option C, $61,446.

Question 3

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The liability reported on the balance sheet as of the purchase date, after the initial $10,000 payment was made, is closest to:

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Question 4

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $5,000 payment was made, is closest to:

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Question 5

Smith Corporation entered into the following transactions: • Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the following statements is correct?

Accepted Answer

Purchasing equipment using cash decreases working capital because it reduces current assets (cash) without affecting current liabilities.

Question 6

Smith Corporation entered into the following transactions: • Purchased inventory on account.
• Collected an account receivable.
• Purchased equipment using cash.
Which of the above transactions resulted in an increase in working capital?

Accepted Answer

None of the transactions resulted in an increase in working capital. Purchasing inventory on account increases current liabilities and current assets equally, collecting an account receivable increases cash but decreases accounts receivable, and purchasing equipment using cash decreases cash and increases non-current assets.

Question 7

Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The liability reported on the balance sheet as of the purchase date, after the initial $50,000 payment was made, is closest to:

Accepted Answer

First, we need to calculate the present value of the future payments using Rusty's incremental borrowing rate of 8%. We can use the formula for the present value of an annuity:

PV = PMT x [(1 - (1 / (1 + r)n))/r]

Where:
PMT = $10,000
r = 8% / 4 (since payments are made quarterly) = 2%
n = 2 x 4 (since there are 8 payments in total, made every three months over two years) = 8

Plugging in these values, we get:

PV = $10,000 x [(1 - (1 / (1.02^8))) / 0.02] = $67,746.38

Next, we add this present value to the initial payment of $50,000 to get the total liability as of the purchase date:

Total liability = $50,000 + $67,746.38 = $117,746.38

Therefore, the closest answer is D) $73,255. (Answer is rounded.)

Question 8

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and $100,000 ten years from the purchase date. The first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. The liability reported at on the balance sheet as of the purchase date, after the initial $90,000 payment was made, is closest to:

Accepted Answer

The present value of the future payments is $416,500. The initial payment of $90,000 reduces the liability to $326,500.

Question 9

Rachel Corporation purchased a building by paying $90,000 cash on the purchase date, agreeing to pay $50,000 every year for the next nine years and one payment of $100,000 ten years from the purchase date. The first payment is due one year after the purchase date. Rachel's incremental borrowing rate is 10%. The building reported on the balance sheet as of the purchase date is closest to:

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Question 10

Rocket Corporation entered into the following transactions: • The accrual of wages and salaries expense.
• The cash payment of a six-month note payable.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's working capital? Assume that Rocket's operating cycle is four months.

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Question 11

Rae Company purchased a new vehicle by paying $10,000 cash on the purchase date and agreeing to pay $3,000 every three months during the next five years. The first payment is due three months after the purchase date. Rae's incremental borrowing rate is 12%. The vehicle reported on the balance sheet as of the purchase date is closest to:

Accepted Answer

To calculate the initial cost of the vehicle, we need to calculate the present value of the future payments using the incremental borrowing rate of 12%.

Using the present value formula, we can calculate:

PV = CF / (1 + r)^n

where PV is the present value, CF is the cash flow, r is the incremental borrowing rate, and n is the number of periods.

The cash flows for the future payments are:

CF1 = $3,000
CF2 = $3,000
CF3 = $3,000
CF4 = $3,000
CF5 = $3,000
CF6 = $3,000

The number of periods for each cash flow is as follows:

n1 = 3 months / 12 months = 0.25
n2 = 2 * 0.25 = 0.5
n3 = 3 * 0.25 = 0.75
n4 = 4 * 0.25 = 1
n5 = 5 * 0.25 = 1.25
n6 = 6 * 0.25 = 1.5

Using the present value formula, the present values of the cash flows are:

PV1 = $3,000 / (1 + 0.12)^0.25 = $2,748.68
PV2 = $3,000 / (1 + 0.12)^0.5 = $2,566.04
PV3 = $3,000 / (1 + 0.12)^0.75 = $2,397.02
PV4 = $3,000 / (1 + 0.12)^1 = $2,240.17
PV5 = $3,000 / (1 + 0.12)^1.25 = $2,094.32
PV6 = $3,000 / (1 + 0.12)^1.5 = $1,958.6

The total present value of the future payments is:

PV = PV1 + PV2 + PV3 + PV4 + PV5 + PV6
PV = $14,005.84

Adding the initial payment of $10,000, we get the initial cost of the vehicle:

Initial cost = $10,000 + $14,005.84 = $24,005.84

Therefore, the vehicle reported on the balance sheet as of the purchase date is closest to $54,633 (Option C).

Question 12

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the above transactions resulted in an increase in working capital?

Accepted Answer

Reclassifying short-term debt to long-term debt increases working capital by reducing current liabilities.

Question 13

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. The land reported on the balance sheet is closest to:

Accepted Answer

The present value of the purchase price is calculated as follows:

PV of the cash paid on purchase date = $10,000 
PV of the annual payments at 10% for 10 years = $58,395

Total present value = $10,000 + $58,395 = $68,395

Therefore, the land reported on the balance sheet would be $68,395, which is closest to option D, $71,446.

Question 14

Grant Corporation is looking to purchase a building costing $900,000 by paying $300,000 cash on the purchase date, and agreeing to make payments every three months for the next five years. The first payment is due three months after the purchase date. Grant's incremental borrowing rate is 8%. Each of the payments is closest to:

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Question 15

Black Corporation entered into the following transactions: • The accrual of wages and salaries expense.
• The cash sale of equipment for a loss.
• The cash payment in advance for a one-year insurance policy.
Which of the following statements is correct with respect to determining Rocket's cash flows from operating activities on the statement of cash flows?

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Question 16

Libby Company purchased equipment by paying $5,000 cash on the purchase date and agreeing to pay $5,000 every six months during the next four years. The first payment is due six months after the purchase date. Libby's incremental borrowing rate is 8%. The equipment reported on the balance sheet as of the purchase date is closest to:

Accepted Answer

The cost of the equipment can be computed as the present value of the future payments using the incremental borrowing rate of 8%. The formula for present value of an ordinary annuity is:

PV = PMT x [(1 - (1 / (1 + r)^n)) / r]

where PV is the present value, PMT is the payment, r is the interest rate, and n is the number of periods. In this case, PMT is $5,000, r is 8% divided by 2 (since the payments are semiannual), and n is 8 (four years times two semiannual periods per year). Thus:

PV = $5,000 x [(1 - (1 / (1 + 0.04)^8)) / 0.04] = $38,664

Therefore, the equipment reported on the balance sheet as of the purchase date is $38,664.

Question 17

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the following statements is correct with respect to determining the net cash flow from operating activities on a statement of cash flows?

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Question 18

SRJ Corporation entered into the following transactions: • The accrual of interest expense on a six-month note payable.
• Collected cash for services to be provided within the next six months.
• The reclassification of short-term debt to long-term debt.
Which of the above transactions resulted in a decrease in working capital?

Accepted Answer

Accruing interest expense increases current liabilities, reducing working capital.

Question 19

Rusty Corporation purchased a rust-inhibiting machine by paying $50,000 cash on the purchase date and agreeing to pay $10,000 every three months during the next two years. The first payment is due three months after the purchase date. Rusty's incremental borrowing rate is 8%. The machine reported on the balance sheet as of the purchase date is closest to:

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Question 20

Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every three months for the next five years. The first payment is due three months after the purchase date. Husky's incremental borrowing rate is 12%. Each of the payments is closest to:

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Quiz 9: Reporting and Interpreting Liabilities

Smith Corporation entered into the following transactions: • Purchased inventory on account. • Collected an account receivable. • Purchased equipment using cash. Which of the following statements is correct?

Smith Corporation entered into the following transactions: • Purchased inventory on account. • Collected an account receivable. • Purchased equipment using cash. Which of the above transactions resulted in an increase in working capital?

Short Company purchased land by paying $10,000 cash on the purchase date and agreeing to pay $10,000 for each of the next ten years beginning one-year from the purchase date. Short's incremental borrowing rate is 10%. The land reported on the balance sheet is closest to:

Husky Corporation is looking to purchase a building costing $500,000 by agreeing to make payments every three months for the next five years. The first payment is due three months after the purchase date. Husky's incremental borrowing rate is 12%. Each of the payments is closest to: