Question

Diane Corporation is preparing its year-end balance sheet. The company records show the following selected amounts at the end of the year:
Total assets $ 530,000
Total noncurrent assets 362,000
Liabilities:
Notes payable (8%, due in 5 years) 15,000
Accounts payable 56,000
Income taxes payable 14,000
Liability for withholding taxes 3,000
Rent revenue collected in advance 7,000
Bonds payable (due in 15 years) 90,000
Wages payable 7,000
Property taxes payable 3,000
Note payable (10%, due in 6 months) 12,000
Interest payable 400
Common stock 100,000
1-a. What is the amount of current liabilities?
1-b. Compute working capital.
2. Would your computation be different if the company reported $250,000 worth of contingent liabilities in the notes to its financial statements?

Answer 1

Answer:

Diane Corporation

1-a. Amount of Current Liabilities:

$102,400

1-b. Computation of working capital:

Working capital = Current assets minus Current liabilities

= $168,000 - 102,400 = $65,600

2. Computation of working capital with contingent liabilities of $250,000 in the notes to the financial statements:

If the contingent liabilities are likely to occur, since the amount has been ascertained, the working capital would have been different.

Working capital would have been = 168,000 - 102,400 - 250,000 = ($184,400).

Explanation:

a) Current Liabilities:

Accounts payable                                 56,000

Income taxes payable                           14,000

Liability for withholding taxes                3,000

Rent revenue collected in advance      7,000

Wages payable                                      7,000

Property taxes payable                         3,000

Note payable (10%, due in 6 months) 12,000

Interest payable                                       400

Total current liabilities                    $102,400

b) Current Assets = Total assets minus noncurrent assets

= $530,000 - 362,000 = $168,000

c) Contingent liabilities are probable future financial obligations.  They become probable to occur in the future as a result of some past events.  If it is probable that they would occur and the amount involved can be reasonably estimated, they are recognized in the accounts.  If the amount cannot be ascertained, they are presented as notes to the financial statements.

d) Current liabilities are the financial obligations owed by an entity to others as a result of past transactions, and their payment or settlement is usually due within the next 12 months.

e) Working capital is the difference between current assets and current liabilities of a company.  It is called working capital because they are the net resources that can be used in the business operations of the company within the current period.