Chapter 11 Current Liabilities and Payroll Study Guide Solutions Fill-in-the-Blank Equations 1. 2. 3. 4. Deductions Working capital Current ratio Quick ratio Exercises 1. School Tools recently purchased inventory from one of its largest suppliers. The company receives an invoice, which states the credit terms 2/10, n/30. Is the liability an example of an account payable, current portion of long-term debt, or short-term notes payable? Account payable 2. Peach Tree Inc. recently rebounded from financial troubles. To satisfy an overdue liability owed to an equipment supplier, the company issued a liability to satisfy the debt at a later date, which also bears interest at a 9% annual rate. Is the newly issued liability an example of an account payable, current portion of long-term debt, or short-term notes payable? Short-term notes payable 3. Pet Supply Co. incurred 10-year notes payable when constructing its newest office. The notes totaled $2.1 million, but in the upcoming year the company plans to pay $250,000 to the creditor. Is the $250,000 an example of an account payable, current portion of long-term debt, or short-term notes payable? Current portion of long-term debt Strategy: Accounts payable are incurred through regular business transactions, typically with a shorter credit term. Short-term notes payable usually have a longer term than accounts payable and bear interest for the time issued. Since long-term debt is usually a large amount, companies may pay the amount owed in installments over periods of time, which are the current portion if expected to be paid within one year. 1 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 2 Chapter 11 4. To satisfy $3,570 of an overdue account payable owed to Collar Co., Pet Supply Co. issued a 10%, 90-day note payable on July 1, 2015. Prepare the journal entry to record the following: a. Issuance of the note July 1 Accounts Payable-Collar Co. 3,570 Notes Payable-Collar Co. 3,570 b. Payment of the note and any interest owed (round interest to the nearest whole dollar) Sept. 30 Notes Payable-Collar Co. 3,570 Interest Expense 89 Cash 3,659 Interest Expense = $3,570 × 10% × 90/360 5. When purchasing equipment, Bed Threads Inc. issued a 15%, 120-day note payable on March 1, 2015. The purchased equipment cost $6,525. Prepare the journal entry to record the following: a. Issuance of the note Mar. 1 Equipment 6,525 Notes Payable 6,525 b. Payment of the note and any interest owed (round interest to the nearest whole dollar) June 30 Notes Payable 6,525 Interest Expense 326 Cash 6,851 Interest Expense = $6,525 × 15% × 120/360 6. On August 1, 2015, School Tools received $3,500 in cash from the bank in exchange for a 14%, 60-day note payable. Prepare the journal entry to record the following: a. Issuance of the note Aug. 1 Cash 3,500 Notes Payable 3,500 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. Current Liabilities and Payroll 3 b. Payment of the note and any interest owed (round interest to the nearest whole dollar) Nov. 30 Notes Payable 3,500 Interest Expense 82 Cash 3,582 Interest Expense = $3,500 × 14% × 60 / 360 Strategy: When issuing a note payable, the company should credit the liability for the amount payable and debit the corresponding account, to show an increase in the asset or decrease in the liability. Upon payment, the company will remove the liability by debiting the note payable, debiting Interest Expense for the amount incurred, and crediting Cash for the interest paid and face amount of the note. 7. Mountain Time borrowed cash from its local bank by issuing a 90-day note with a $3,500 face amount. The note is discounted at 6% and issued on June 1, 2015. a. Determine the proceeds of the note (round interest to the nearest whole dollar). $3,447; $3,500 – ($3,500 × 6% × 90/360) b. Prepare the journal entry to record the issuance of the note. June 1 Cash 3,447 Interest Expense 53 Notes Payable 3,500 c. Prepare the journal entry to record the payment of the note and any interest owed. Aug. 30 Notes Payable 3,500 Cash 3,500 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 4 Chapter 11 8. Palmetto Charms borrowed cash from its bank in exchange for a 60-day note on April 1, 2015. The note is discounted at 7% and has a face amount of $6,750. a. Determine the proceeds of the note (round interest to the nearest whole dollar). $6,671; $6,750 – ($6,750 × 7% × 60/360) b. Prepare the journal entry to record the issuance of the note. April 1 Cash 6,671 Interest Expense 79 Notes Payable 6,750 c. Prepare the journal entry to record the payment of the note. May 31 Notes Payable 6,750 Cash 6,750 9. School Tools issued a note payable to its bank in exchange for cash on July 1, 2015. The 120-day note has a $9,500 face amount and is discounted at 9%. a. Determine the proceeds of the note (round interest to the nearest whole dollar). $9,215; $9,500 – ($9,500 × 9% × 120/360) b. Prepare the journal entry to record the issuance of the note. July 1 Cash 9,215 Interest Expense 285 Notes Payable 9,500 c. Prepare the journal entry to record the payment of the note. Oct. 31 Notes Payable 9,500 Cash 9,500 Strategy: When issuing a discounted note, a business is essentially paying the interest at the beginning of the note by receiving less cash than the face amount of the note. To calculate Interest Expense, determine the interest that will accrue on the note for the time period. The proceeds received from the note is the face amount less the interest “paid.” Since the business receives less cash when issuing the note, the Interest Expense should also be recorded upon issuance. When paying the note, the business gives the creditor cash for the full face amount and removes the note from its books by debiting Notes Payable. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. Current Liabilities and Payroll 10. Cody Smith’s weekly gross earnings for the week were $3,150. Smith has one exemption. Using the wage bracket withholding table below with a $100 standard withholding allowance for each exemption, what is Smith’s federal income tax withholding? Table for Percentage Method of Withholding WEEKLY Payroll Period (a) SINGLE person (including head of household)— If the amount of wages (after The amount of subtracting withholding allowances) income tax is: to withhold is: Not over $42 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0 Over— But not over— of excess over— $42 —$214 . . $0.00 plus 10% —$42 $214 —$739 . . $17.20 plus 15% —$214 $739 —$1,732 . . $95.95 plus 25% —$739 $1,732 —$3,566 . . $344.20 plus 28% —$1,732 $3,566 —$7,703 . . $857.72 plus 33% —$3,566 $7,703 —$7,735 . . $2,222.93 plus 35% —$7,703 $7,735 . . . . . . . . . . . . . . $2,234.13 plus 39.6% —$7,735 Source: Publication 15, Employer’s Tax Guide, Internal Revenue Service, 2013. Total wage payment One allowance (provided by IRS) Multiplied by allowance claimed Amount subject to withholding Initial withholding from wage bracket Plus additional withholding: 28% of excess over $1,732 ($3,050 – $1,732) × 28% Federal income tax withholding $3,150 $100 1 100 $3,050 $344.20 369.04 $713.24 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 5 6 Chapter 11 11. Kim Akinson’s weekly gross earnings for the week were $4,750. She has three exemptions. Using the wage bracket in Exercise 10, what is her federal income tax withholding? Assume there is a $90 standard withholding allowance for each exemption. Total wage payment One allowance (provided by IRS) Multiplied by allowance claimed Amount subject to withholding Initial withholding from wage bracket Plus additional withholding: 33% of excess over $3,566 ($4,480 – $3,566) × 33% Federal income tax withholding $4,750 $90 3 270 $4,480 $ 857.72 301.62 $1,159.34 12. Judy Allen’s biweekly gross earnings for the period were $6,900. Allen has two exemptions. Using the wage bracket below, calculate her federal income tax withholding if there is a $80 standard withholding allowance for each exemption. Table for Percentage Method of Withholding BIWEEKLY Payroll Period (a) SINGLE person (including head of household)— If the amount of wages (after subtracting withholding allowances) The amount of income tax is: to withhold is: Not over $85 . . . . . . . . . . . . . . . . . . . . . . . . . .$0 Over— But not over— of excess over— $85 —$428 . . $0.00 plus 10% —$85 $428 —$1,479 . . $34.30 plus 15% —$428 $1,479 —$3,463 . . $191.95 plus 25% —$1,479 $3,463 —$7,133 . . $687.95 plus 28% —$3,463 $7,133 —$15,406 . . $1,715.55 plus 33% —$7,133 $15,406 —$15,469 . . $4,445.64 plus 35% —$15,406 $15,469 . . . . . . . . . . . . . . $4,467.69 plus 39.6% —$15,469 Source: IRS Publication 15, Employers Tax Guide, Internal Revenue Service, 2013. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. Current Liabilities and Payroll Total wage payment One allowance (provided by IRS) Multiplied by allowance claimed Amount subject to withholding $6,900 $80 2 Initial withholding from wage bracket Plus additional withholding: 28% of excess over $3,463 ($6,740 – $3,463) × 28% Federal income tax withholding 160 $6,740 $ 687.95 917.56 $1,605.51 Strategy: First, calculate the amount of wages subject to the federal income tax withholding. The amount subject to withholding is the total wages less the dollar deduction for allowances. Once calculating the amount subject to the withholding, use the table to determine the bracket that relates to the employee. The tax is calculated as the initial withholding plus a percentage of the amount of wages subject to withholding over a defined amount. 13. Using the information from Exercise 10, calculate Cody Smith’s net pay. Assume the social security rate is 6% and Medicare is 1.5%. Total wage payment Deductions: Federal income tax withholding Social security tax ($3,150 × 6%) Medicare tax ($3,150 × 1.5%) Net pay $3,150.00 $713.24 189.00 47.25 949.49 $2,200.51 14. Using the information from Exercise 11, calculate Kim Akinson’s net pay. Assume the social security rate is 6% and Medicare is 1.5%. Total wage payment Deductions: Federal income tax withholding Social security tax ($4,750 × 6%) Medicare tax ($4,750 × 1.5%) Net pay $4,750.00 $1,159.34 285.00 71.25 1,515.59 $3,234.41 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 7 8 Chapter 11 15. Using the information from Exercise 12, calculate Judy Allen’s net pay. Assume the social security rate is 6% and Medicare is 1.5%. She also makes a 1% contribution of her gross earnings to her retirement fund. Total wage payment Deductions: Federal income tax withholding Social security tax ($6,900 × 6%) Retirement savings ($6,900 × 1%) Medicare tax ($6,900 × 1.5%) Net pay $6,900.00 $1,605.51 414.00 69.00 103.50 2,192.01 $4,707.99 Strategy: Net pay is determined by subtracting the deductions for the period from the total wages. First, calculate the deductions using the information given, if the deductions are a percentage of total wages. Total the deductions and subtract the sum from the total wage payment to arrive at net pay. 16. Which element of the payroll system keeps a running total of an employee’s history, including deductions and wage earnings? Employee’s earnings record 17. Each month, an employee receives a statement from his employer which gives the following information: gross wages, FICA tax, social security tax, Medicare tax, and a calculation of net pay. Which element of the payroll system is the statement an example of? Payroll check 18. A manager of a business would like to review various data for the previous payroll period, including hours worked, overtime earnings, check numbers, and various taxes withheld. Which element of the payroll system would the manager use to review this data? Payroll register Strategy: The elements of the payroll system are the employee’s earnings record, payroll check, and payroll register. The employee’s earnings record is a record of each employee’s earnings and various data about these earnings, such as withholdings and overtime. A payroll check gives the employee the information used to calculate the net pay for a pay period. The payroll register gives all information needed to record the payroll expenses for the period with detail as to how the amounts were calculated. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. Current Liabilities and Payroll 19. Use the payroll register below to prepare the journal entry to record the salaries expenses for the week ended January 10, 2015. All miscellaneous deductions should create a liability payable to the RPC Helpers. Deductions Withheld SS Tax Fed. Inc. Tax Medicare Tax Retirement Savings Paid Accounts Debited Misc. Total Net Pay Check No. 129 93.60 23.40 60.20 20.00 15.60 212.80 1,347.20 370.50 92.63 217.97 100.00 61.75 842.85 5,332.15 Sales Salaries Exp. Office Salaries Exp. 1,560.00 3,650.00 2,525.00 Jan. 10 Sales Salaries Expense 3,650.00 Office Salaries Expense 2,525.00 Social Security Tax Payable 370.50 Medicare Tax Payable 92.63 Federal Income Tax Payable 217.97 Retirement Savings Deductions Payable 100.00 RPC Helpers Deductions Payable 61.75 Salaries Payable 5,332.15 20. Use the payroll register below to prepare the journal entry to record the salaries expenses for the week ended February 12, 2015. All miscellaneous deductions should create a liability payable to MedHelp Co. Deductions Withheld SS Tax Medicare Tax Fed. Inc. Tax Paid Accounts Debited Retirement Savings Misc. Total Net Pay Check No. 129 93.60 23.40 60.20 20.00 15.60 212.80 1,347.20 643.20 230.10 1,052.66 255.00 95.20 2,276.16 13,838.84 Sales Salaries Exp. Office Salaries Exp. 1,560.00 9,790.00 6,325.00 Feb. 12 Sales Salaries Expense 9,790.00 Office Salaries Expense 6,325.00 Social Security Tax Payable 643.20 Medicare Tax Payable 230.10 Federal Income Tax Payable 1,052.66 Retirement Savings Deductions Payable 255.00 MedHelp Co. Deductions Payable 95.20 Salaries Payable 13,838.84 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 9 10 Chapter 11 21. For the pay period ending February 17, 2015, School Tools had gross sales salaries of $4,790 and office salaries of $6,400. From these wages, the company withheld $290 of social security taxes, $400 of federal income taxes, and $120 of Medicare taxes. Prepare the journal entry to record the payroll for the period. Feb. 17 Sales Salaries Expense 4,790 Office Salaries Expense 6,400 Social Security Taxes Payable 290 Federal Income Taxes Payable 400 Medicare Taxes Payable 120 Salaries Payable 10,380 Strategy: Salaries Expense is the equal to the gross salaries earned by the employees. Since the company withholds and collects money that will be owed to another party, the company should record a liability for these withholdings. The difference between the Salaries Expense and withholdings liabilities is the Salaries Payable, which is also the amount the company will pay to the employee. 22. Palmetto Charms gives each of its employees ten days of paid vacation time per year. The company estimates the vacation pay for the 2015 fiscal year ending on September 30 is $275,000. Prepare the journal entry to record the vacation pay expense. Sept. 30 Vacation Pay Expense 275,000 Vacation Pay Payable 275,000 23. Mountain Time gives its 30 employees one day per month of paid vacation time. The company estimates the average daily wage for an employee is $200. Prepare the journal entry as of the calendar year-end to record the vacation pay expense. Dec. 31 Vacation Pay Expense 72,000 Vacation Pay Payable 72,000 Vacation Pay Expense = 30 employees × 12 days per year × $200 per day ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. Current Liabilities and Payroll 11 24. RPC Helpers has 250 employees that earn on average a daily salary of $275. The company gives each employee fifteen vacation days per year. Prepare the journal entry to record the vacation pay expense for the 2015 fiscal year ending on March 31. Mar. 31 Vacation Pay Expense 1,031,250 Vacation Pay Payable 1,031,250 Vacation Pay Expense = 250 employees × 15 days per year × $275 per day Strategy: The Vacation Pay Expense is estimated by the company, which also creates the Vacation Pay Payable. The expense should be recorded in the period that the employees earned the vacation pay. The company must record the payable since it may not pay the employees at the same time as recording the expense. Upon payment to the employees, the payable will be reduced. 25. Pet Supply Co. provides a defined contribution pension plan for all employees. The company promises to contribute 7.5% of gross earnings to the pension. During the month of March, employees earned gross earnings of $450,750. Prepare the journal entry to record the expense. Mar. 31 Pension Expense 33,806.25 Cash 33,806.25 Pension Expense = $450,750 × 7.5% 26. Bed Threads Inc. provides a defined contribution pension plan for all employees. The company agrees to contribute 11% of monthly gross earnings to the pension. For the month of May, Bed Threads Inc. records a journal entry that credits Salaries Payable for $14,900. Deductions for the month’s salaries totaled $675. Prepare the journal entry to record the expense. May 31 Pension Expense 1,713.25 Cash 1,713.25 Pension Expense = ($14,900 + $675) × 11% ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 12 Chapter 11 27. Tammy’s Sites provides a defined contribution pension plan for all employees. The company promises to contribute 10% of monthly gross salaries to the pension. During the month of September, employees received $225,700, after withholdings. Withholdings and deductions totaled $10,200 for the month. Prepare the journal entry to record the expense. Sept. 30 Pension Expense 23,590 Cash 23,590 Pension Expense = ($225,700 + $10,200) × 10% Strategy: Under a defined contribution pension plan, the employer contributes cash to the pension based upon a fixed amount, which is usually a percentage of the salaries paid. The amount contributed to the plan is equal to the Pension Expense for the period. 28. Pet Supply Co. has a defined benefit pension plan for all employees who have worked with the company for at least fifteen years. The plan requires an annual contribution of $67,500. On December 31, 2015, the company contributes the entire cost to the fund. Prepare the journal entry to record the cost of the fund. Dec. 31 Pension Expense 67,500 Cash 67,500 29. Assume that Pet Supply Co. only contributes $39,200 of the required annual contribution of $67,500 for the defined benefit pension plan. Prepare the journal entry to record the cost of the fund. Dec. 31 Pension Expense 67,500 Cash 39,200 Underfunded Pension Liability 28,300 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. Current Liabilities and Payroll 13 30. Bed Threads Inc.’s defined benefit pension plan requires an annual contribution of $52,750. On the last day of its 2015 fiscal year, the company contributes $40,750 to the pension plan. Prepare the journal entry to record the cost of the fund on March 31, 2015. Mar. 31 Pension Expense 52,750 Cash 40,750 Underfunded Pension Liability 12,000 Strategy: Under a defined benefit pension plan, the Pension Expense is determined based on a formula. The company pays an amount of cash each year, which may differ from the actual cost for the year. If the cash paid is less than the cost, the pension will be underfunded, creating a liability for the company. To book the liability, the company should credit Underfunded Pension Liability. 31. A customer of Surfing Sid’s brings a lawsuit against the company on December 15, 2015. By the calendar year-end, the company’s lawyer expects there is a reasonably possible chance the plaintiff will win the suit. a. What is the correct accounting treatment for 2015? Disclose the liability in the notes. b. If the lawsuit is still open by the 2016 year-end but now with a remote possibility, what is the correct accounting treatment for this year? None; there is a remote possibility of the company paying the settlement. 32. A competitor of Nana’s Bakeshop brings a suit against the company during the 2015 fiscal year. By year end, the suit is still open. The company’s lawyer expects that the competitor will probably win but is unable to estimate an amount. a. What is the correct accounting treatment for 2015? Disclose the liability in the notes. b. By the 2016 year-end, the suit is still open. However, the lawyer now expects Nana’s Bakeshop to pay $62,600 to the competitor upon settlement. What is the correct accounting treatment for this year? Record the estimated $62,600 liability and disclose in the notes. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 14 Chapter 11 33. A competitor of Surfing Sid’s files a lawsuit for $32,500 against the company in 2015. By the year-end, the lawsuit has not been settled, but the lawyer believes there is a remote possibility the competitor will win. What is the correct accounting treatment for the contingent liability? None; there is a remote possibility of the company paying the settlement. Strategy: A contingent liability has three possibilities of occurring: probably, reasonably possible, and remote. If a liability has a remote possibility, the company does not need to record a liability or disclose it in the notes. If a liability is reasonably possible, it should be disclosed in the notes, since the company should warn the stakeholders. If the liability is probable, the company should disclose the liability in the notes to alert the stakeholders. If the liability is estimable, the amount of the liability should be recorded, since stakeholders also would like to see how the liability will affect the financial statements. 34. During March, Equipped has sales of $75,400. All products sold have a 12-month warranty for repairs. The company estimates the average cost of repairs to be 3% of the sales price. Prepare the journal entry to record the warranty expense for the month of March. Mar. 31 Product Warranty Expense 2,262 Product Warranty Payable 2,262 Product Warranty Expense = $75,400 × 3% 35. On July 15, 2015, Equipped repairs a customer’s merchandise that was purchased in March. To repair the merchandise, the company uses $50 of supplies and incurs labor charges of $75. Prepare the journal entry to record the repair of the merchandise. July 15 Product Warranty Payable 125 Supplies 50 Wages Payable 75 ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. Current Liabilities and Payroll 15 36. Equipped makes total sales of Product A of $320,500 for the month of October and total sales of Product B of $100,700. Both products have a 24-month warranty. The company estimates that Product A’s warranty will cost 5% of the sales price, while Product B’s warranty will cost 7% of the sales price. a. Prepare the journal entry to record the Product Warranty Expense for the month. Oct. 31 Product Warranty Expense 23,074 Product Warranty Payable-Product A 16,025 Product Warranty Payable-Product B 7,049 Product Warranty Expense = ($320,500 × 5%) + ($100,700 × 7%) b. During the month of November, the company uses $1,400 of supplies to repair Product A and $900 of supplies to repair Product B. Prepare the journal entries to record the repairs. Nov. 30 Product Warranty Payable-Product A 1,400 Supplies 1,400 30 Product Warranty Payable-Product B 900 Supplies 900 Strategy: When recording Product Warranty Expense, the company must also book the contingent liability, Product Warranty Payable, because the liability is probable and reasonably estimable. Since most companies book the expense and liability as an estimate based on a percentage of sales, calculate the expense by multiplying the percentage times the sales revenue. Once the contingency occurs, the liability should be decreased by debiting the payable, and the asset used for the repair should be decreased by crediting the account. 37. Mel Corp. has current assets of $3,550 and current liabilities of $4,220. Calculate the working capital and current ratio, rounding to two decimal places. What do these numbers indicate? Working capital: $(670) = $3,550 – $4,220 Current ratio: 0.84 = $3,550/$4,220 A negative working capital and current ratio less than one indicates that the company does not have enough current assets on hand to pay its current liabilities. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 16 Chapter 11 38. Use the information in the table to calculate the working capital and current ratio for 2015 and 2016. Round answers to two decimal places. Determine if the change is favorable or unfavorable. Current assets Current liabilities Working capital Current ratio $ 2016 20,930 18,700 2,230 1.12 $ 2015 16,789 14,320 2,469 1.17 The decrease in both working capital and the current ratio are unfavorable trends. 39. Harbor Time has total assets of $5,970 and current liabilities of $4,930. The company’s only fixed asset is the machine recorded at $1,200. Calculate the company’s working capital and current ratio. Does the company have plenty of current assets to pay its current liabilities? Working capital: $(160) = ($5,970 – $1,200) – $4,930 Current ratio: 0.97 = ($5,970 – $1,200)/$4,930 Since the current ratio is less than one, the company does not have sufficient current assets to pay its current liabilities. Strategy: Calculate working capital by subtracting the current liabilities from the current assets. If working capital is negative, the company has more current liabilities than current assets, and the company would be unable to pay its current liabilities using current assets at that point in time. Current ratio is found by dividing the current assets by current liabilities. The current ratio is the number of times that a company can pay its current liabilities using funds from its current assets. If the current ratio is less than one, the company would not be able to pay its current liabilities using only funds from the current assets at that time, and the opposite if the ratio is greater than one. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. Current Liabilities and Payroll 17 40. Use the information below taken from Mel Corp.’s balance sheet to calculate the company’s quick ratio for 2015 and 2016. Does the change indicate a favorable or unfavorable trend? 2016 Current assets: Cash Treasury bills Accounts receivable Inventory Current liabilities: Accounts payable Short-term note payable Quick ratio 2015 $ 775 225 910 400 $ 790 200 875 325 $ 690 100 $ 550 230 2.42 2.39 2015: ($790 + $200 + $875)/($550 + $230) 2016: ($775 + $225 + $910)/($690 + $100) The increase in the quick ratio is a favorable trend. 41. Equipped has total liabilities of $9,750 on its balance sheet as of the 2015 fiscal yearend. The long-term liabilities include a bond payable for $2,150 and a note payable for $975. The company’s current assets include: cash, $1,790; cash equivalents, $420; shortterm notes receivable (due in 60 days), $1,700; accounts receivable, $2,825; and inventory, $1,100. Calculate the quick ratio for the company. Round answers to two decimal places. Does the company have enough quick assets to pay its current liabilities in a short period of time? 1.02 = ($1,790 + $420 + $1,700 + $2,825)/($9,750 – $2,150 – $975) Since the quick ratio is above 1, the company does have enough quick assets to pay its current liabilities in a short period of time. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part. 18 Chapter 11 42. Use the information below to calculate the quick ratio for the two companies. Round answers to two decimal places. Which company is in a better position to pay its current liabilities if necessary in a short period of time? Current assets: Cash Commercial paper Accounts receivable Inventory Current liabilities: Accounts payable Short-term note payable Quick Ratio A Corp. B Corp. $1,060 390 410 685 $325 75 125 350 $ 720 220 $165 90 1.98 2.06 B Corp. is in a better position to pay its current liabilities because it has a higher quick ratio. Strategy: To calculate the quick ratio, add all quick assets, which include any assets the company should be able to turn into cash easily, such as selling the cash equivalents or accounts receivable. Divide the quick assets by current liabilities to calculate the quick ratio. The higher the ratio, the better position the company is in to pay its current liabilities with its quick assets. If the ratio is less than one, the company must use funds other than quick assets to pay its current liabilities at that point in time. ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to publicly accessible website, in whole or in part.
