Question

Norma Smith is the controller of Bramble Corporation and is responsible for the preparation of the year-end financial statements. For each of the following transactions that occurred during the year, indicate the dollar amount to be reported as a current liability as of December 31, 2017. (Enter 0 for amounts if no current liability is to be reported)
(a) On December 20, 2017, a former employee filed a legal action against Bramble for $103,150 for wrongful dismissal. Management believes the action to be frivolous and without merit. The likelihood of payment to the employee is remote.

(b) Bonuses to key employees based on net income for 2017 are estimated to be $192,900.

(c) On December 1, 2017, the company borrowed $900,000 at 8% per year. Interest is paid quarterly.

(d) Accounts receivable at December 31, 2017, is $10,145,500. An ageing analysis indicates that Bramble?s expense provision for doubtful accounts is estimated to be 3% of the receivables balance.

(e) On December 15, 2017, the company declared a $3.50 per share dividend on the 41,810 shares of common stock outstanding, to be paid on January 5, 2018.

(f) During the year, customer advances of $193,100 were received; $57,900 of this amount was earned by December 31, 2017.

Answer 1

Answer:

Current liability refers to the short term obligations of the firm which need to be settled down within a period of one year or within a normal operating cycle.

(a) $0 would be reported as current liability, as it is not a current liability. It is a contingent liability.

(b) The amount of current liability is $192,900 because it is a liability of a firm to pay bonuses to the employees.

(c) The amount of current liability is as follows:

= $900,000 × 0.08 × (1/12)

= $6,000

Payment of interest on loan is a liability of the firm.

(d) $0 would be indicated in current liability, because provision for doubtful accounts is subtracted from the total accounts receivable to determine the net account receivables.

(e) Proposed dividend is a part of current liability and the amount of dividend to be shown as current liability is as follows:

= Dividend per share × No. of shares outstanding

= $3.50 per share × 41,810

= $146,335

(f) Customer advances is a current liability and the amount of customer advances to be reported in current liability is calculated as follows:

= Customer advances - Amount earned this year

= $193,100 - $57,900

= $135,200