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Acct Chapter 13, lecture #1 Essay

Break question – Chapter 13, lecture #1

Wilk Co. reported the following liabilities at December 31 of the current year:

Accounts Payable – trade 750,000
Short-term borrowings 400,000
Bank loan, current portion $100,0003,500,000
Other bank loan1,000,000

The bank loan of $3,500,000 was in violation of the loan agreement. The creditor had not waived the rights for the loan. Half the other bank loan will mature on June 30 next year, and the other half in the year following. Interest on the other bank loan is not included in the above figures. Interest of $75,000 was paid on June 30 of the prior year along with an installment on the loan principal, and interest of $50,000 will be paid with the next installment on June 30 next year. What amount should Wilk report as current liabilities at December 31 this year?

a. $1,250,000
b. $4,650,000
c. $5,175,000
d. $5,700,000


The A/P and short-term borrowings are current, and because the $3.5M bank loan is in violation of a loan provision (and the creditor has not waived his rights), the full $3.5M is due and a current liability.

Of the $1 M bank loan, interest that has accrued between June 30 last year and December 31 also needs to be shown as a current liability, along with the $500,000 principal payment (1/2 the $1 million).

The total interest is $50,000, but only ½ of that has accrued between July 1
of the current year and December 31, so another $25,000 should be included as a current liability as of December 31. The interest rate is 5% (but that wasn’t part of the required).

750,000 + 400,000 + 3,500,000 + 500,000 + 25,000 = $5,175,000 (C)

Break question – Chapter 13, lecture #2

During January of the current year, Haze Corp. won a litigation award of $15,000 which was tripled to $45,000 to include punitive damages. The defendant, who is financially stable, has appealed only the $30,000 of punitive damages. Haze was awarded $55,000 in an unrelated suit, which is being appealed by the defendant. Counsel is unable to determine the outcome of these appeals. In its current year financial statements, what should Haze report as a pretax gain?

a. $15,000
b. $45,000
c. $50,000
d. $95,000


Because SFAS #5 requires that gain contingencies not be accrued before realization, therefore only the $15,000 can be accrued (even though the cash has not been received yet, Haze has a legal claim on the cash, hence it is a receivable).

The fact that Haze has won an additional $85,000 (30,000 + 55,000) should be disclosed, because it is at least reasonably possible that they will be awarded.

Break question – Chapter 13, lecture #3

An entity is most likely to account for an asset retirement obligation (ARO)

a. Recognizing the fair value of the liability using an expected present value technique b. Recognizing a liability equal to the sum of the net undiscounted future cash flows associated with the ARO c. Decreasing the carrying value of the amount of the related long-lived asset d. Decreasing the liability of the ARO to reflect the accretion expense


Companies should recognize the PV of the ARO as the fair value of the liability using an expected value technique (A).

The other side of the entry is a debit to the CV of the asset (so it increases the CV…it does not decrease it).

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