Question 8 (Exercise) - Intermediate Accounting (Kieso)

Question

E5-8 (L02) (Current vs. Long-term Liabilities) Frederic Chopin Corporation is preparing its December 31, 2017, balance sheet. The following items may be reported as either a current or long-term liability. 

1. On December 15, 2017, Chopin declared a cash dividend of \(2.50 per share to stockholders of record on December 31. The dividend is payable on January 15, 2018. Chopin has issued 1,000,000 shares of common stock, of which 50,000 shares are held in treasury. 

2. At December 31, bonds payable of \)100,000,000 are outstanding. The bonds pay 12% interest every September 30 and mature in installments of \(25,000,000 every September 30, beginning September 30, 2018. 

3. At December 31, 2016, customer advances were \)12,000,000. During 2017, Chopin collected \(30,000,000 of customer advances; advances of \)25,000,000 should be recognized in income.

Instructions For each item above, indicate the dollar amounts to be reported as a current liability and as a long-term liability if any.

Step-by-Step Solution

Answer

The total of current liabilities is equal to $47,375,000.

Definition of Cash Dividend

The amount paid in cash to the shareholders as their portion or share in the profit is a cash dividend. The directors of the business entity decide it.

Current Liabilities

Particular	Amount $
Dividend payable	$2,375,000
Interest payable	3,000,000
Bond payable	25,000,000
Unearned revenue (12,000,000 + 30,000,000 – 25,000,000)	17,000,000
Total current liabilities	$47,375,000

Note:

1. Interest payable is calculated as 12% of $100,000,000 for three months.

Non-Current Liabilities

Particular	Amount $
Bonds payable (100,000,000 –25,000,000)	75,000,000
Total	$75,000,000