session 21 - liabilities present/future value

Question 1

How is a “probable” liability treated?

Answer 1

Record the liability if the amount can be estimated

Question 2

How is a “reasonably possible” liability treated?

Answer 2

It is included in notes to financial statements

Question 3

How is an “unlikely” liability treated?

Answer 3

It doesn’t get reported

Question 4

What is the value that liabilities are recorded?

Answer 4

Their present value

Question 5

What is the journal entry on Jan. 1, 2014 for the following transaction: On January 1, 2014, Starbucks bought some new delivery trucks. The company signed a note agreeing to pay $200,000 on December 31, 2015. The market interest rate for this note is 12%.

Answer 5

Dr. Delivery Trucks (A) 159,440
Cr. Notes Payable (L) 159,440

Question 6

What is the journal entry on Dec. 31, 2014 for the following transaction: On January 1, 2014, Starbucks bought some new delivery trucks. The company signed a note agreeing to pay $200,000 on December 31, 2015. The market interest rate for this note is 12%.

Answer 6

Dr. Interest Expense (IS/SE) 19,133
Cr. Notes Payable (L) 19,133

Question 7

What is the journal entry on Dec. 31, 2015 for the following transaction: On January 1, 2014, Starbucks bought some new delivery trucks. The company signed a note agreeing to pay $200,000 on December 31, 2015. The market interest rate for this note is 12%.

Answer 7

Dr. Interest Expense (IS/SE) 21,429
Cr. Notes Payable (L) 21,429

Dr. Notes Payable (L) 200,000
Cr. Cash (A) 200,000

Question 8

What are the four criteria for a capital lease (only one needs to be true)?

Answer 8

1. Lease term is 75% or more of the asset’s expected economic life
2. Ownership of the asset is transferred to the lessee at the end of the lease
3. Lease permits lessee to purchase the asset at a price that is lower than its fair market value
4. The present value of the lease payments 90% or more of the fair market value of the asset when the lease is signed

Question 9

What is the journal entry for an operating lease at inception?

Answer 9

no entry

Question 10

What is the journal entry for an operating lease at year end?

Answer 10

Dr. Rent Expense
Cr. Cash

Question 11

What is the journal entry for a capital lease at inception?

Answer 11

Dr. Leased asset
Cr. Lease obligation

Question 12

What is the journal entry for a capital lease at year end?

Answer 12

Dr. Amortization expense
Cr. Accumulated Depreciation

Dr. Interest Expense
Dr. Lease Obligation
Cr. Cash