Problem 1

For each of the following items, identify whether it should be reported as a current liability
(CL), a non-current liability (NCL), both a current and non-current liability, or not recorded
at all.

CL a. A bank overdraft
CL b. Refundable sales tax collected on sales
CL c. Accounts payable
CL d. Accrued vacation pay
Both e. A bank loan with a five-year term that requires monthly payments
Not Recorded f. A commitment under a purchase contract that is not onerous
CL g. Unearned revenue
NCL h. Decommissioning costs
Not recorded i. A claim against the company filed under a lawsuit
CL j. Income taxes payable
CL k. Unremitted payroll deductions
Both l. A five-year warranty on the sale of an automobile
CL m. Notes payable
CL n. A deposit received from a customer
Both o. Loyalty points awarded by a hotel chain

Problem 2
On October 5, Bendel Ltd. renegotiated the terms of an $8,000 outstanding account
payable with a supplier. The supplier agreed to replace the outstanding amount with a
120-day, 9% note. Bendel Ltd. has a December 31 year-end.

Required:
a. Prepare the journal entry made by Bendel Ltd. on October 5.
b. Prepare any journal entries required by Bendel Ltd. on December 31.
c. Prepare the journal entry required by Bendel Ltd. on the note’s maturity date.
October 05 Accounts Payable 8,000
Notes Payable 8,000

December 31 Interest Expenses 171.62

Interest Payable 171.62
(8,000 x 9%) x 87/ 365

October 05 Notes Payable 8,000

Interest Expenses 65.09
Interest Payable 171.62
Cash 8,236.71
 Problem 3
1. John Henry has a small housecleaning business that currently is a sole proprietorship. The
business has nine employees, annual sales of $480,000, total liabilities of $90,000, and total
assets of $263,000. Including the business, Henry has a personal net worth of $467,000 and
nonbusiness liabilities of $42,000, represented by a mortgage on his home. He would like
to give one of his employees, Tori Kobayashi, an equity interest in the business. Henry is
considering either the partnership form or the corporate form, where Kobayashi would be
given some stock. Kobayashi has a personal net worth of $36,000.

a. What is the extent of Henry’s exposure under the sole proprietorship in the case of a
large lawsuit (say, $600,000)?
b. What is his exposure under a partnership form? Do the partners share the risk?
c. What is his exposure under the corporate form?
ANSWERS:
a. Sole proprietorship has unlimited liability, therefore in the case of large lawsuit Henry is
personally liable and will lose all his personal assets ($467,000).
b. Partnership also has unlimited liability since the business structure do not create separate
legal entity, moreover, the risk is not shared equally. In the case of large lawsuit of
600,000, Kobayashi will only share $36,000 which is all his net worth, on the other hand,
Henry has much more to lose since his net worth is $467,000.
c. Corporation has limited liability so in case of a lawsuit, Henry would lose only the
business and not all his personal assets. The net worth of the business amounts to
$173,000 (Solution: Total Assets $263,000 – Liabilities $90,000); Henry would lose only
$173,000 of his personal net work and the remaining $294,000 (Solution: Personal net
worth $467,000 - Business net worth $173,000), will be protected under the corporate
structure.