CA13-1 (Nature of Liabilities) Presented below is the current liabilities section of Micro Corporation.
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($000)
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2015
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2014
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Current Liabilities
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Notes payable
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$68,713
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$7,700
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Accounts payable
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$179,496
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$101,379
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Compensation to employees
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$60,312
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$31,649
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Accrued liabilities
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$158,198
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$77,621
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Income tax payable
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$10,486
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$26,491
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Current maturities of long term debt
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$16,592
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$6,649
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Total current liabilities
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$493,797
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$251,489
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Instructions:
Answer the followings:
a) What are the essential characteristic that make an item a liability?
b) How does one distinguish between a current liability and a long-term liability?
c) What are accrued liabilities? Give three examples of accrued liabilities that Micro might have.
d) What is the theoretically correct way to value liabilities? How current liabilities are usually valued?
e) Why are notes payable reported first in the current liabilities section?
f) What might be the items that comprise Micro's liability for "Compensation to employees"?
CA13-6 (Warranties and Loss Contingencies) The following independent situations involve loss contingencies.
Part 2: Constantine Company is being sued for $4,000,000 for an injury caused to child as a result of alleged negligence while the child was visiting Constantine Company plant in March 2014. The suit was filed in July 2014. Constantine's lawyer states that it is probable that Constantine will lose the suit and be found liable for a judgement costing anywhere from $400,000 to $2,000,000. However, the lawyer states that the most probable judgement is $1,000,000.
Instructions:
How should Constantine report the suit in its 2014 financial statements? Discuss the rationale for your answer. Include in your answer disclosures, if any, that should be made in Constantine's financial statements or notes.
CA15-4 (Stock Dividends and Splits) The directors of Merchant Corporation are considering the issuance of a stock dividend. They have asked you to discuss the proposed action by answering the following questions.
Instructions:
a) What is a stock dividend? How is a stock dividend distinguished from a stock split (1) from a legal standpoint, and (2) from an accounting standpoint?
b) For what reasons does a corporation usually declare a stock dividend? A stock split?
c) Discuss the amount, if any, of retained earnings to be capitalized in connection with a stock dividend.
