Very Short Question Answer
Write down the meaning of contingent liabilities.
Liabilities that may come into existence depending upon the outcome of some other event are known as contingent liabilities. Outstanding lawsuits and product warranties are common examples of contingent liabilities. A contingent liability should be accrued and presented on the balance sheet if it is possible and if the amount can be reasonably estimated.
Define current liabilities.
Current liabilities are obligations that are expected to be paid within one year of the balance sheet date or within the operating cycle of the business, whichever is longer.
Write any two differences between accounts payable and notes payable.
The differences between accounts payable and notes payable may be mentioned in following way.
| Bases of Difference
|
Accounts Payable
|
Notes Payable
|
| Terms
|
There is no specific term included with accounts payable.
|
Notes payable is supported by a number of terms as maturity period, interest rate, etc.
|
| Interest
|
No interest is associated with the accounts payable.
|
Interest is explicitly or implicitly involved with notes payable.
|
XYZ Company receives a one year loan from Civil Bank Ltd. on 1st Shrawan 2075 The face value of the Note of Rs.200,000 must be repaid on 31st Ashad 2076 along with 15% interest.
Required: Journal entries to record the loan and its repayment.
SOLUTION
Journal Entries
| Date | Account Titles and Explanation | PR | Debit (Rs.) | Credit (Rs.) |
| 2075/4/1
2076/3/31
|
Bank a/c ……………………………… Dr.
To Notes payable (Loan) a/c (For cash received on note payable/loan)
Notes payable a/c……………………… Dr. Interest a/c……………………………….Dr To Bank a/c (For payment of notes payable and interest)
|
200,000
200,000 30,000
|
200,000
230,000
|
Long Question Answer
On October 1, 2019, Kantipur Grocery Shop borrowed Rs.250,000 from NIC Asia Bank. Kantipur Grocery Shop signed a 10-month, 10% promissory note for the entire amount. Kantipur uses a calendar year-end.
Required:
- Journal entry on October 1 to record the issuance of the note.
- Journal entry needed at December 31, 2019, to accrue interest.
- Journal entry to record the payment of the note on due date.
SOLUTION
In the Books of Kantipur Grocery Shop
Journal Entries
On October 1, 2019, a company borrowed Rs.25,000 from the bank. The company signed a 10 month, 8% promissory note for the entire amount. It uses a calendar year-end.
Required: What adjustments would be made on the year-end? Also show the journal entries for the payment of principal and interest on the due date
On Magh 1, 2076, BG Company accepted a six-month, 10% Rs.130,000 interest bearing note from the EG Company in payment of accounts receivable. BG Company’s year end is Chaitra 31. EG Company paid the note and interest on the due date.
Required:
- Who is the maker and who is the payable of the note?
- Journal entries BG Company needs to make in connection with this note.
- Journal entries EG Company needs to make in connection with this note.
SOLUTION
- Maker: EG Company
Payee: BG Company
Journal Entries
In the Book of BG Company
XYZ Company has reported the following accounts balances on December 31, 2019.
Bank overdraft Rs.100,000
Accounts payable Rs.240,000
Accrued expenses Rs.160,000
Accounts receivable Rs.1,100,000
Unearned income Rs.120,000
Capital stock Rs.200,000
Bonds payable Rs.600,000
Investment Rs.400,000
Inventories Rs.1,000,000
Notes payable Rs.180,000
Required:
- Current liabilities section of the company’s balance sheet of December 31, 2019.
- Current ratio of the company and comment on liquidity position of the company.
SOLUTION
1.
2. Current ratio = Current asset/ Current liabilities
=2100,000/800,000
= 2.625 times
Current assets = A/R + Inventory = 11,00,000 + 10,00,000 = 21,00,000
The current ratio of 2.625 times implies that for every rupee of current liabilities the firm has 2.625 in current assets. It is almost 2:1 and slightly more which represent the company has enough current assets to pay the short term debts. So, the XYZ Company is in high liquidity position.