Financial Accounting: In an Economic Context

REVIEW PROBLEM

Before adjustments and closing on December 31, 2011, the financial records of Martin Brothers indicated the following balances:

The terms of an outstanding long-term note payable state that Martin must maintain a current ratio of 1.5, or the note will be in default. The current ratio computed from the information above is 1.82 ($69,000 — $38,000). However, the following transactions are not reflected in the above balances:

1. Merchandise purchased on account for $5,000 was in transit as of December 31, 2011. The terms of the purchase were FOB shipping point.
2. One-half of the interest on the $10,000 short-term note payable should be accrued as of December 31.
3. A $4,000 installment on a long-term debt will be due on March 31, 2012. Martin Brothers intends to withdraw $4,000 from a fund, listed on the balance sheet as a long-term investment, to meet the payment.
4. One-third of the unearned revenue has been earned as of December 31.
5. Wages in the amount of $4,000 are owed as of December 31. Federal income and social security taxes withheld on these wages equal $800 and $400, respectively.
6. The total income tax liability for 2011 was estimated at year-end to be $34,000. Income tax payments during the year totaled $32,000.
7. Albinus, Inc. brought suit against Martin Brothers early in 2011. As of December 31, Martin's legal counsel estimates that there is a 50 percent probability ...