Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 115

Other accrued liabilities—interest (Note: This is an analytical assignment involv­ing the interpretation of financial statement disclosures.) A review of the accounting records at Corless Co. revealed the following information concerning the company’s liabilities that were outstanding at December 31, 2011, and 2010, respectively:

Debt (Thousands)	2011	Year-End Interest Rate	2010	Year-End Interest Rate
Short-term debt:
Working capital loans	$250	8%	$190	7%
Current maturities of
long-term debt	80	6%	80	6%
Long-term debt:
Debenture bonds due in 2031 . .	400	9%	400	9%
Serial bonds due in equal
annual installments	240	6%	320	6%

Required:

a. Corless Co. has not yet made an adjustment to accrue the interest expense related to its working capital loans for the year ended December 31, 2011. Assume that the amount of interest to be accrued can be accurately estimated using an average-for-the-year interest rate applied to the average liability balance. Use the horizontal model (or write the journal entry) to record the effect of the 2011 interest accrual for working capital loans.

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b. Note that the dollar amount and interest rate of the current maturities of long- term debt have not changed from 2010 to 2011. Does this mean that the $80,000 amount owed at the end of 2010 still has not been paid as of December 31, 2011? (Hint: Explain your answer with reference to other information provided in the problem.)

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c. Assume that the debenture bonds were originally issued at their face amount. However, the market rate of interest for bonds of similar risk has decreased significantly in recent years and is 7% at December 31, 2011. If the debenture bonds were both callable by Corless Co. and convertible by its bondholders, which event is more likely to occur? Explain your answer.

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d. Assume the same facts as in part c. Would the market value of Corless Co.’s debenture bonds be more than or less than the $400,000 reported amount? Is this good news or bad news to the management of Corless Co.?

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e. When the Serial Bonds account decreased during the year, what other account was affected, and how was it affected? Use the horizontal model (or write the journal entry) to record the effect of this transaction.

Step 1 of 10

Interpretation of other accrued liabilities

Accrued liabilities : This refers to an expense item that a company has incurred however has not yet paid during a specified financial period.