Accounting for Liabilities and Equity

Complete three accounting exercises related to liabilities and equity using a provided worksheet.
Information about liabilities is most useful when the balance sheet identifies them as either current or long-term. Managers need to know when obligations are due so they can plan for them and take appropriate action. This is the essence of classifying liabilities.
Current Liabilities
All liabilities for an organization reported in the financial statements exhibit three distinct characteristics: (1) definition, (2) classification, and (3) uncertainty. No liability can be reported when one or more of these characteristics is missing. As an example of liability definition, most organizations expect to pay salaries or wages to their employees in the months and years to come; however, these future payments are not liabilities because no past event, such as employee work, resulted in a present obligation.
Uncertainty in liabilities involves addressing three important questions: (1) Whom to pay? (2) When to pay? (3) How much to pay? The answers to these questions helps accounting employees make the correct entries, post to the correct customer accounts, and reconcile liability amounts to the financial statements.
Long-Term Liability and Corporate Stock
Organizational projects that require large amounts of money often are funded from the issuance of bonds or corporate stock. Some examples of organizations that use this form of financing include for-profit and non-profit companies, government units, water authorities, and school districts. In return for financing these large projects, bonds promise to repay the lender with interest. Purchasers of corporate stock do so with the expectation of dividend earnings and stock value appreciation.
This assessment consists of three accounting exercises. The exercises are provided in the Accounting for Liabilities and Equity Worksheet. Use this worksheet to record and submit your solutions for Exercises 4-1, 4-2, and 4-3.
In addition, practice problems for each exercise are provided in the Assessment 4 Practice Problems Worksheet.The worksheet and answer key can be foundin the Capella Resources activity of this assessment and are optional.
The following resourceisrequired to complete the assessment.
Click the link provided to view the following resource:
Accounting for Liabilities and Equity Worksheet [DOCX].
Submission Guidelines
Submit your Accounting for Liabilities and Equity Worksheet for faculty evaluation. Please do not submit completed practice problems with your assessment.
Financial Accounting Principles
Assessment 4: Accounting for Liabilities and Equity Worksheet
Use this worksheet to complete the following three exercises for Assessment 4. Refer to the instructions in the course for submitting your assessment.
Exercise 4-1
During 2011 and 2012, Data Resources, Inc. engaged in financial transactions that involved short-term liabilities.
Using the financial transaction information provided below, determine the following. Record your responses on page 2.
All three note maturity dates.
The interest due on all three notes on the dates they mature, assuming a 360-day year.
The interest expense for the 2011 year-end adjusting entry.
For distinguished performance, determine the interest expense for 2012.
Note: The company uses a perpetual inventory system.

Mar 19

Purchased $41,250 worth of merchandise from Chipcom, on credit. Terms: 1/10, n/30.

April 29

Replaced the Mar 19 account payable to Chipcom with a 120-day, $35,000 note at 7% annual interest, plus a cash payment of $6,250.

Jun 16

Borrowed $55,000 cash from Sunnyvale Bank. Signed a 90-day, 8% interest-bearing note, with a $55,000 face value.


Paid Chipcom the amount due on the note on the date of maturity.


Paid Sunnyvale Bank the amount due on the note on the date of maturity.

Oct 30

Borrowed $18,000 cash from UCB Bank. Signed a 90-day, 7% interest-bearing note, with a $18,000 face value.

Dec 31

Recorded an accrued interest adjustment on the UCB Bank note.


Paid UCB Bank the amount due on the note on the date of maturity.


Sunnyvale Bank

[Record your answers to item 1 here.]
Prepare journal entries for all 2011 and 2012 events and transactions for Data Resources, Inc.
Exercise 4-2
On January 1, 2012, Fromer issued $3,000,000 of 12-year, 7 percent bonds. Interest is paid semi-annually on June 30 and December 31. The issue price was $2,592,000.
Prepare the January 1, 2012, journal entry that records the bond issue.
Compute the following for each semi-annual period:
Cash payment.
Straight-line discount amortization.
Interest expense.
Determine the total interest expense recognized over the life of the bonds.
Prepare the first two years of an amortization table (use the straight-line method).


Unamortized Discount

[Create your amortization table here.]
For distinguished performance, prepare journal entries for the first two interest payments.
Exercise 4-3
Stockholders’ equity in TransWorld Inc. on December 31, 2010, is shown below:

Common stock: 60,000 authorized shares, par
value of $15, 25,000 shares issued and outstanding.


Paid-in capital in excess of par value, common stock


Retained earnings


Total equity

Stockholder equity accounts were affected by the following transactions in 2011:

Jan 1

TransWorld purchased 2,000 treasury shares at $24/share.

Jan 7

Declared a $3/share dividend, payable on Feb 15 to the Feb 28 stockholders of record.

Feb 15

Paid the dividend (Jan 7 declaration).

May 7

Sold 800 of treasury shares for cash at $27/share.

Aug 15

Sold 1200 of treasury shares for cash at $21/share.

Sep 20

Declared a $3/share dividend, payable on Oct 15 to the Sep 30 stockholders of record.

Oct 15

Paid the dividend (Sep 20 declaration).

Dec 31

Closed the credit balance of $188,000 (from net income) in the Retained Earnings Income Summary account.
Use the information provided to prepare the following:
Journal entries for the 2011 transactions.
December 31, 2011, retained earnings statement.

Statement of Retained Earnings
For Year Ended December 31, 2011
[Create your retained earnings statement here.]
For distinguished performance, prepare the investors’ equity section of TransWorld’s December 31, 2011, balance sheet.

Stockholders’ Equity Section of the Balance Sheet
December 31, 2011
[Create your balance sheet here.]

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