ch13 current liabilities and contingencies 2

8/20/2019 Ch13 Current Liabilities and Contingencies 2

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CHAPTER 13

CURRENT LIABILITIES AND CONTINGENCIES

TRUE-FALSE—Conceptual

An!e" No# Dec"$pt$onF 1. Zero-interest-bearing note payable.F 2. Dividends in arrears.T 3. Examples of unearned revenues.T 4. eporting dis!ount on "otes #ayable.F $. %urrently maturing long-term debt.F &. Ex!luding s'ort-term debt refinan!ed.T (. )!!ounting for sales tax !olle!ted.

F *. )!!ounting for si!+ pay.T ,. o!ial se!urity taxes as liabilities.F 1. Definition of a!!umulation rig'ts.T 11. e!ogni/ing !ompensated absen!es expense.F 12. )!!ruing estimated loss !ontingen!y.T 13. Dis!losing gain !ontingen!ies.F 14. ales-type 0arranty profit.T 1$. Fair value of asset retirement obligation.T 1&. eporting a litigation liability.F 1(. Expense 0arranty approa!'.F 1*. )!id-test ratio !omponents.F 1,. )ffe!t on !urrent ratio.

T 2. eporting !urrent liabilities.

%ULTIPLE CHOICE—Conceptual

An!e" No# Dec"$pt$ond 21. Definition of a liability.d 22. "ature of !urrent liabilities.a 23. e!ording of a!!ounts payable.a 24. %lassifi!ation of notes payable.b 2$. %lassifi!ation of dis!ounts on notes payable.d 2&. dentify !urrent liability.

! 2(. onds reported as !urrent liability.d 2*. dentify item 0'i!' is not a !urrent liability.! 2,. Dividends reported as !urrent liability.d 3. %lassifi!ation of sto!+ dividends distributable.! 31. dentify item 0'i!' is not a !urrent liability.d 32. dentify !urrent liability.d 33. 'ort-term obligations expe!ted to be refinan!ed.d 34. )bility to !onsummate refinan!ing of s'ort-term obligations.d 3$. Determine 0'at is a liability.a 3&. %lassifi!ation of sales taxes.


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%urrent 5iabilities and %ontingen!ies

%ULTIPLE CHOICE—Co(putat$onal cont#.

An!e" No# Dec"$pt$ond ((. %al!ulation of va!ation expense to be re!ogni/ed.a (*. %al!ulation of a!!rued liability to be re!ogni/ed for !ompensated balan!es.b (,. %al!ulate rebate expense and liability.d *. )sset retirement obligation.a *1. %al!ulate insuran!e expense and loss.b *2. %al!ulate rebate expense and liability.d *3. )sset retirement obligation.d *4. %al!ulate 0arranty liability.b *$. %al!ulate liability for premiums.d *&. %al!ulate 0arranty liability.b *(. %al!ulate liability for premiums.d **. Determine premiums expense for t'e year.d *,. %al!ulate estimated liability for premiums.d ,. %al!ulate estimated liability for premiums.b ,1. Determine amount to a!!rue as a loss !ontingen!y.d ,2. )!!rue 0arranty expense for t'e year.a ,3. %al!ulate 0arranty liability.d ,4. Determine amount to a!!rue as a gain !ontingen!y.b ,$. %al!ulate liability for unredeemed !oupons.! ,&. %al!ulate t'e 8ui!+ no0ledge of a!!ounts payable.b 11. Determine !urrent and long-term portions of debt.! 12. Determine a!!rued interest payable.d 13. Determine amount of s'ort-term debt to be reported.a 14. %al!ulate a!!rued salaries payable.d 1$. )!!rual of payroll taxes.b 1&. %al!ulate unearned servi!e !ontra!t revenue.! 1(. Determine liability from unredeemed trading stamps.d 1*. Determine range of loss a!!rual.d 1,. %al!ulate t'e estimated 0arranty liability.! 11. Dis!losure of a !asualty !laim.

E0ERCISES

Ite( Dec"$pt$onE13-111 "otes payable.E13-112 #ayroll entries.E13-113 %ompensated absen!es.E13-114 %ontingent liabilities.E13-11$ #remiums.E13-11& #remiums.

6E13-11( onus !al!ulation.

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Tet Ban& 'o" Inte"(e)$ate Account$n*+ T!el't, E)$t$on

PROBLE%S

Ite( Dec"$pt$on#13-11* )!!ounts and notes payable.#13-11, efinan!ing of s'ort-term debt.#13-12 #remiums.#13-121 ?arranties.

CHAPTER LEARNING OBECTI2ES

1. Des!ribe t'e nature@ type@ and valuation of !urrent liabilities.

2. Explain t'e !lassifi!ation issues of s'ort-term debt expe!ted to be refinan!ed.

3. dentify types of employee-related liabilities.

4. dentify t'e !riteria used to a!!ount for and dis!lose gain and loss !ontingen!ies.

$. Explain t'e a!!ounting for different types of loss !ontingen!ies.

&. ndi!ate 'o0 to present and analy/e liabilities and !ontingen!ies.

6(. %ompute employee bonuses under differing arrangements.

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SU%%AR4 OF LEARNING OBECTI2ES B4 5UESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type

Lea"n$n* O67ect$8e 1

1. TF 21. 7% 2$. 7% 2,. 7% &3. 7% 12. 7%2. TF 22. 7% 2&. 7% 3. 7% &4. 7% 111. E3. TF 23. 7% 2(. 7% 31. 7% 1. 7% 11*. #4. TF 24. 7% 2*. 7% 32. 7% 11. 7%

Lea"n$n* O67ect$8e /

$. TF 33. 7% 3&. 7% &&. 7% &,. 7% 13. 7%&. TF 34. 7% 3(. 7% &(. 7% (. 7% 11,. #(. TF 3$. 7% &$. 7% &*. 7% (1. 7%


*. TF 3$. 7% 41. 7% (3. 7% ((. 7% 112. E,. TF 3*. 7% 42. 7% (4. 7% (*. 7% 113. E

1. TF

#

3,. 7% 43. 7% ($. 7% 14. 7%11. TF 4. 7% (2. 7% (&. 7% 1$. 7%

Lea"n$n* O67ect$8e

12. TF 3$. 7% 4$. 7% 4(. 7% 4,. 7%13. TF 44. 7% 4&. 7% 4*. 7% 114. E


14. TF $2. 7% (,. 7% *$. 7% ,1. 7% 1(. 7% 12. #1$. TF $3. 7% *. 7% *&. 7% ,2. 7% 1*. 7% 121. #1&. TF $4. 7% *1. 7% *(. 7% ,3. 7% 1,. 7%1(. TF #$$. 7% *2. 7% **. 7% ,4. 7% 11. 7%$. 7% $&. 7% *3. 7% *,. 7% ,$. 7% 11$. E

$1. 7%

$(. 7% *4. 7% ,. 7% 1&. 7% 11&. ELea"n$n* O67ect$8e :

1*. TF 2. TF #$,. 7% &1. 7% 11*. # 12. #1,. TF $*. 7% &. 7% ,&. 7% 11,. #

Lea"n$n* O67ect$8e ;<

&2. 7% ,(. 7% ,*. 7% ,,. 7% 11(. E

"oteA TF B True-False E B Exer!ise7% B 7ultiple %'oi!e # B #roblem

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TRUE-FALSE—Conceptual

1. ) /ero-interest-bearing note payable t'at is issued at a dis!ount 0ill not result in any interestexpense being re!ogni/ed.

2. Dividends in arrears on !umulative preferred sto!+ s'ould be re!orded as a !urrent liability.

3. 7aga/ine subs!riptions and airline ti!+et sales bot' result in unearned revenues.

4. Dis!ount on "otes #ayable is a !ontra a!!ount to "otes #ayable on t'e balan!e s'eet.

$. )ll long-term debt maturing 0it'in t'e next year must be !lassified as a !urrent liability ont'e balan!e s'eet.

&. ) s'ort-term obligation !an be ex!luded from !urrent liabilities if t'e !ompany intends torefinan!e it on a long-term basis.

(. 7any !ompanies do not segregate t'e sales tax !olle!ted and t'e amount of t'e sale at t'etime of t'e sale.

*. ) !ompany must a!!rue a liability for si!+ pay t'at a!!umulates but does not vest.

,. %ompanies report t'e amount of so!ial se!urity taxes 0it''eld from employees as 0ell ast'e !ompaniesC mat!'ing portion as !urrent liabilities until t'ey are remitted.

1. )!!umulated rig'ts exist 0'en an employer 'as an obligation to ma+e payment to anemployee even after terminating 'is employment.

11. %ompanies s'ould re!ogni/e t'e expense and related liability for !ompensated absen!es in

t'e year earned by employees.

12. %ompanies s'ould a!!rue an estimated loss from a loss !ontingen!y if information availableprior to t'e issuan!e of finan!ial statements indi!ates t'at it is probable t'at a liability 'asbeen in!urred.

13. ) !ompany dis!loses gain !ontingen!ies in t'e notes only 0'en a 'ig' probability exists for reali/ing t'em.

14. T'e expe!ted profit from a sales type 0arranty t'at !overs several years s'ould all bere!ogni/ed in t'e period t'e 0arranty is sold.

1$. T'e fair value of an asset retirement obligation is re!orded as bot' an in!rease to t'erelated asset and a liability.

1&. T'e !ause for litigation must 'ave o!!urred on or before t'e date of t'e finan!ial statementsto report a liability in t'e finan!ial statements.

1(. nder t'e expense 0arranty approa!'@ !ompanies !'arge 0arranty !osts only to t'e periodin 0'i!' t'ey !omply 0it' t'e 0arranty.

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1*. #repaid insuran!e s'ould be in!luded in t'e numerator 0'en !omputing t'e a!id-test


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24. )mong t'e s'ort-term obligations of 5an!e %ompany as of De!ember 31@ t'e balan!es'eet date@ are notes payable totaling 2$@ 0it' t'e 7adison "ational an+. T'eseare ,-day notes@ rene0able for anot'er ,-day period. T'ese notes s'ould be !lassifiedon t'e balan!e s'eet of 5an!e %ompany asa. !urrent liabilities.b. deferred !'arges.!. long-term liabilities.d. intermediate debt.

2$. ?'i!' of t'e follo0ing is not true about t'e dis!ount on s'ort-term notes payablea. T'e Dis!ount on "otes #ayable a!!ount 'as a debit balan!e.b. T'e Dis!ount on "otes #ayable a!!ount s'ould be reported as an asset on t'e

balan!e s'eet.!. ?'en t'ere is a dis!ount on a note payable@ t'e effe!tive interest rate is 'ig'er t'an

t'e stated dis!ount rate.d. )ll of t'ese are true.

2&. ?'i!' of t'e follo0ing may be a !urrent liabilitya. ?it''eld n!ome Taxesb. Deposits e!eived from %ustomers!. Deferred evenued. )ll of t'ese

2(. ?'i!' of t'e follo0ing items is a !urrent liabilitya. onds


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31. Gf t'e follo0ing items@ t'e only one 0'i!' s'ould not be !lassified as a !urrent liability isa. !urrent maturities of long-term debt.b. sales taxes payable.!. s'ort-term obligations expe!ted to be refinan!ed.d. unearned revenues.

32. )n a!!ount 0'i!' 0ould be !lassified as a !urrent liability isa. dividends payable in t'e !ompanys sto!+.b. a!!ounts payableHdebit balan!es.!. losses expe!ted to be in!urred 0it'in t'e next t0elve mont's in ex!ess of t'e

!ompanys insuran!e !overage.d. none of t'ese.

33. ?'i!' of t'e follo0ing statements is !orre!ta. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm

intends to refinan!e t'e obligation on a long-term basis.b. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm !an

demonstrate an ability to !onsummate a refinan!ing.!. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if it is paid off

after t'e balan!e s'eet date and subse8uently repla!ed by long-term debt before t'ebalan!e s'eet is issued.

d. "one of t'ese.

34. T'e ability to !onsummate t'e refinan!ing of a s'ort-term obligation may be demon-strated by

a. a!tually refinan!ing t'e obligation by issuing a long-term obligation after t'e date of t'e balan!e s'eet but before it is issued.

b. entering into a finan!ing agreement t'at permits t'e enterprise to refinan!e t'e debton a long-term basis.

!. a!tually refinan!ing t'e obligation by issuing e8uity se!urities after t'e date of t'e

balan!e s'eet but before it is issued.d. all of t'ese.

3$. ?'i!' of t'e follo0ing statements is false?a. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm

intends to refinan!e t'e obligation on a long-term basis and demonstrates an ability to!omplete t'e refinan!ing.

b. %as' dividends s'ould be re!orded as a liability 0'en t'ey are de!lared by t'e boardof dire!tors.

!. nder t'e !as' basis met'od@ 0arranty !osts are !'arged to expense as t'ey are paid.d. F%) taxes 0it''eld from employees payroll !'e!+s s'ould never be re!orded as a

liability sin!e t'e employer 0ill eventually remit t'e amounts 0it''eld to t'e

appropriate taxing aut'ority.

3&. ?'i!' of t'e follo0ing is not a !orre!t statement about sales taxesa. ales taxes are an expense of t'e seller.b. 7any !ompanies re!ord sales taxes in t'e sales a!!ount.!. f sales taxes are in!luded in t'e sales a!!ount@ t'e first step to find t'e amount of

sales taxes is to divide sales by 1 plus t'e sales tax rate.d. )ll of t'ese are true.

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3(. f a s'ort-term obligation is ex!luded from !urrent liabilities be!ause of refinan!ing@ t'efootnote to t'e finan!ial statements des!ribing t'is event s'ould in!lude all of t'e follo0inginformation except a. a general des!ription of t'e finan!ing arrangement.b. t'e terms of t'e ne0 obligation in!urred or to be in!urred.!. t'e terms of any e8uity se!urity issued or to be issued.d. t'e number of finan!ing institutions t'at refused to refinan!e t'e debt@ if any.

3*. n a!!ounting for !ompensated absen!es@ t'e differen!e bet0een vested rig'ts anda!!umulated rig'ts isa. vested rig'ts are normally for a longer period of employment t'an are a!!umulated

rig'ts.b. vested rig'ts are not !ontingent upon an employees future servi!e.!. vested rig'ts are a legal and binding obligation on t'e !ompany@ 0'ereas a!!umulated

rig'ts expire at t'e end of t'e a!!ounting period in 0'i!' t'ey arose.d. vested rig'ts !arry a stipulated dollar amount t'at is o0ed to t'e employeeI

a!!umulated rig'ts do not represent monetary !ompensation.

#3,. )n employees net


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43. T'e amount of t'e liability for !ompensated absen!es s'ould be based on

1. t'e !urrent rates of pay in effe!t 0'en employees earn t'e rig't to!ompensated absen!es.

2. t'e future rates of pay expe!ted to be paid 0'en employees use!ompensated time.

3. t'e present value of t'e amount expe!ted to be paid in future periods.a. 1.b. 2.!. 3.d. Eit'er 1 or 2 is a!!eptable.

44. ?'i!' of t'e follo0ing is t'e proper 0ay to report a gain !ontingen!ya. )s an a!!rued amount.b. )s deferred revenue.!. )s an a!!ount re!eivable 0it' additional dis!losure explaining t'e nature of t'e

!ontingen!y.d. )s a dis!losure only.

4$. ?'i!' of t'e follo0ing !ontingen!ies need not be dis!losed in t'e finan!ial statements or t'e notes t'eretoa. #robable losses not reasonably estimableb. Environmental liabilities t'at !annot be reasonably estimated!. 9uarantees of indebtedness of ot'ersd. )ll of t'ese must be dis!losed.

4&. ?'i!' of t'e follo0ing sets of !onditions 0ould give rise to t'e a!!rual of a !ontingen!yunder !urrent generally a!!epted a!!ounting prin!iplesa. )mount of loss is reasonably estimable and event o!!urs infre8uently.b. )mount of loss is reasonably estimable and o!!urren!e of event is probable.!. Event is unusual in nature and o!!urren!e of event is probable.d. Event is unusual in nature and event o!!urs infre8uently.

4(. 7ar+ ?ard is a farmer 0'o o0ns land 0'i!' borders on t'e rig't-of-0ay of t'e "ort'ernailroad. Gn )ugust 1@ 2(@ due to t'e admitted negligen!e of t'e ailroad@ 'ay on t'efarm 0as set on fire and burned. ?ard 'ad 'ad a dispute 0it' t'e ailroad for severalyears !on!erning t'e o0ners'ip of a small par!el of land. T'e representative of t'eailroad 'as offered to assign any rig'ts 0'i!' t'e ailroad may 'ave in t'e land to ?ardin ex!'ange for a release of 'is rig't to reimbursement for t'e loss 'e 'as sustained fromt'e fire. ?ard appears in!lined to a!!ept t'e ailroads offer. T'e ailroads 2( finan!ialstatements s'ould in!lude t'e follo0ing related to t'e in!identAa. re!ognition of a loss and !reation of a liability for t'e value of t'e land.b. re!ognition of a loss only.

!. !reation of a liability only.d. dis!losure in note form only.

4*. ) !ontingen!y !an be a!!rued 0'ena. it is !ertain t'at funds are available to settle t'e disputed amount.b. an asset may 'ave been impaired.!. t'e amount of t'e loss !an be reasonably estimated and it is probable t'at an asset

'as been impaired or a liability in!urred.d. it is probable t'at an asset 'as been impaired or a liability in!urred even t'oug' t'e

amount of t'e loss !annot be reasonably estimated.

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4,. ) !ontingent liabilitya. definitely exists as a liability but its amount and due date are indeterminable.b. is a!!rued even t'oug' not reasonably estimated.!. is not dis!losed in t'e finan!ial statements.d. is t'e result of a loss !ontingen!y.

$. To re!ord an asset retirement obligation


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#$$. 7ayberry %o. 'as a loss !ontingen!y to a!!rue. T'e loss amount !an only be reasonablyestimated 0it'in a range of out!omes. "o single amount 0it'in t'e range is a better estimate t'an any ot'er amount. T'e amount of loss a!!rual s'ould bea. /ero.b. t'e minimum of t'e range.!. t'e mean of t'e range.d. t'e maximum of t'e range.

$&. 7arx %ompany be!omes a0are of a la0suit after t'e date of t'e finan!ial statements@ butbefore t'ey are issued. ) loss and related liability s'ould be reported in t'e finan!ialstatements if t'e amount !an be reasonably estimated@ an unfavorable out!ome is 'ig'lyprobable@ anda. t'e 7arx %ompany admits guilt.b. t'e !ourt 0ill de!ide t'e !ase 0it'in one year.!. t'e damages appear to be material.d. t'e !ause for a!tion o!!urred during t'e a!!ounting period !overed by t'e finan!ial

statements.

$(. se of t'e a!!rual met'od in a!!ounting for produ!t 0arranty !ostsa. is re8uired for federal in!ome tax purposes.b. is fre8uently :ustified on t'e basis of expedien!y 0'en 0arranty !osts are immaterial.!. finds t'e expense a!!ount being !'arged 0'en t'e seller performs in !omplian!e 0it'

t'e 0arranty.d. represents a!!epted pra!ti!e and s'ould be used 0'enever t'e 0arranty is an integral

and inseparable part of t'e sale.

$*. ?'i!' of t'e follo0ing is not a!!eptable treatment for t'e presentation of !urrentliabilitiesa. 5isting !urrent liabilities in order of maturityb. 5isting !urrent liabilities a!!ording to amount

!. Gffsetting !urrent liabilities against assets t'at are to be applied to t'eir li8uidationd. 'o0ing !urrent liabilities immediately belo0 !urrent assets to obtain a presentation of

0or+ing !apital

#$,. T'e ratio of !urrent assets to !urrent liabilities is !alled t'ea. !urrent ratio.b. a!id-test ratio.!. !urrent asset turnover ratio.d. !urrent liability turnover ratio.

&. )!!rued liabilities are dis!losed in finan!ial statements bya. a footnote to t'e statements.

b. s'o0ing t'e amount among t'e liabilities but not extending it to t'e liability total.!. an appropriation of retained earnings.d. appropriately !lassifying t'em as regular liabilities in t'e balan!e s'eet.

&1. T'e numerator of t'e a!id-test ratio !onsists of a. total !urrent assets.b. !as' and mar+etable se!urities.!. !as' and net re!eivables.d. !as'@ mar+etable se!urities@ and net re!eivables.

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6&2. ?'i!' of t'e follo0ing is not a permissible met'od of !al!ulating a bonus to an employeea. T'e bonus is based on in!ome before dedu!tions for t'e bonus and in!ome taxes.b. T'e bonus is based on in!ome after dedu!tion of t'e bonus but before dedu!tion of

in!ome taxes.!. T'e bonus is based on in!ome after dedu!tions for t'e bonus and in!ome taxes.d. )ll of t'ese are permissible.

%ult$ple C,o$ce An!e"—Conceptual

Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An#

21. d 2(. ! 33. d 3,. d 4$. d $1. ! $(. d22. d 2*. d 34. d 4. d 4&. b $2. ! $*. !

23. a 2,. ! 3$. d 41. d 4(. a $3. ! $,. a

24. a 3. d 3&. a 42. ! 4*. ! $4. a &. d

2$. b 31. ! 3(. d 43. d 4,. d $$. b &1. d

2&. d 32. d 3*. b 44. d $. b $&. d 6&2. d

olutions to t'ose 7ultiple %'oi!e 8uestions for 0'i!' t'e ans0er is Jnone of t'ese.K

22. ) long-term debt maturing !urrently to be paid 0it' !urrent assets is a !urrent liability.

32. )!!ounts #ayable@ ?ages #ayable@ et!.@ 0ould be examples of !urrent liabilities.

33. T'e !ompany must bot' intend to refinan!e t'e obligation on a long-term basis anddemonstrate t'e ability to !onsummate t'e refinan!ing to ex!lude a s'ort-term obligationfrom !urrent liabilities.

%ULTIPLE CHOICE—Co(putat$onal

&3. Edson %orp. signed a t'ree-mont'@ /ero-interest-bearing note on "ovember 1@ 2( for t'e pur!'ase of 1$@ of inventory. T'e fa!e value of t'e note 0as 1$2@2$.

)ssuming Edson used a JDis!ount on "ote #ayableK a!!ount to initially re!ord t'e noteand t'at t'e dis!ount 0ill be amorti/ed e8ually over t'e 3-mont' period@ t'e ad:ustingentry made at De!ember 31@ 2( 0ill in!lude aa. debit to Dis!ount on "ote #ayable for (3$.b. debit to nterest Expense for 1@4(.!. !redit to Dis!ount on "ote #ayable for (3$.d. !redit to nterest Expense for 1@4(.

&4. T'e effe!tive interest on a 12-mont'@ /ero-interest-bearing note payable of 3@@dis!ounted at t'e ban+ at 1L isa. 1.*(L.b. 1L.!. ,.,L.d. 11.11L.

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&$. Gn February 1@ 2(@ after issuan!e of its finan!ial statements for 2&@ Flynn %ompanyentered into a finan!ing agreement 0it' 5ebo an+@ allo0ing Flynn %ompany to borro0 upto 4@@ at any time t'roug' 2,. )mounts borro0ed under t'e agreement bear interest at 2L above t'e ban+s prime interest rate and mature t0o years from t'e date of loan. Flynn %ompany presently 'as 1@$@ of notes payable 0it' First "ational an+maturing 7ar!' 1$@ 2(. T'e !ompany intends to borro0 2@$@ under t'eagreement 0it' 5ebo and li8uidate t'e notes payable to First "ational. T'e agreement0it' 5ebo also re8uires Flynn to maintain a 0or+ing !apital level of &@@ andpro'ibits t'e payment of dividends on !ommon sto!+ 0it'out prior approval by 5ebo an+.From t'e above information only@ t'e total s'ort-term debt of Flynn %ompany as of t'eDe!ember 31@ 2( balan!e s'eet date isa. .b. 1@$@.!. 2@@.d. 4@@.

&&. Gn De!ember 31@ 2&@ Frye %o. 'as 2@@ of s'ort-term notes payable due onFebruary 14@ 2(. Gn Manuary 1@ 2(@ Frye arranged a line of !redit 0it' %ounty an+0'i!' allo0s Frye to borro0 up to 1@$@ at one per!ent above t'e prime rate for t'ree years. Gn February 2@ 2(@ Frye borro0ed 1@2@ from %ounty an+ and used$@ additional !as' to li8uidate 1@(@ of t'e s'ort-term notes payable. T'eamount of t'e s'ort-term notes payable t'at s'ould be reported as !urrent liabilities on t'eDe!ember 31@ 2& balan!e s'eet 0'i!' is issued on 7ar!' $@ 2( isa. .b. 3@.!. [email protected]. *@.

se t'e follo0ing information for 8uestions &( and &*.

aney %o. is a retail store operating in a state 0it' a &L retail sales tax. T'e retailer may +eep2L of t'e sales tax !olle!ted. aney %o. re!ords t'e sales tax in t'e ales a!!ount. T'e amountre!orded in t'e ales a!!ount during 7ay 0as 14*@4.

&(. T'e amount of sales taxes


16/37


&,. Trent@ n!.@ is a retail store operating in a state 0it' a $L retail sales tax. T'e state la0provides t'at t'e retail sales tax !olle!ted during t'e mont' must be remitted to t'e stateduring t'e follo0ing mont'. f t'e amount !olle!ted is remitted to t'e state on or beforet'e t0entiet' of t'e follo0ing mont'@ t'e retailer may +eep 3L of t'e sales tax !olle!ted.Gn )pril 1@ 2(@ Trent remitted *1@4* tax to t'e state tax division for 7ar!' 2( retailsales. ?'at 0as Trent s 7ar!' 2( retail sales sub:e!t to sales taxa. 1@&2,@&.b. 1@$,&@.!. 1@&*@.d. 1@&4$@.

(. Nolbert %orporation 'as 2@$@ of s'ort-term debt it expe!ts to retire 0it' pro!eedsfrom t'e sale of ($@ s'ares of !ommon sto!+. f t'e sto!+ is sold for 2 per s'aresubse8uent to t'e balan!e s'eet date@ but before t'e balan!e s'eet is issued@ 0'atamount of s'ort-term debt !ould be ex!luded from !urrent liabilitiesa. 1@$@b. 2@$@!. 1@@d.

(1. 9rogan %orporation 'as 1@*@ of s'ort-term debt it expe!ts to retire 0it' pro!eedsfrom t'e sale of &@ s'ares of !ommon sto!+. f t'e sto!+ is sold for 2 per s'aresubse8uent to t'e balan!e s'eet date@ but before t'e balan!e s'eet is issued@ 0'atamount of s'ort-term debt !ould be ex!luded from !urrent liabilitiesa. 1@2@b. 1@*@!. &@d.

(2. Timmons %o.@ 0'i!' 'as a taxable payroll of $@@ is sub:e!t to FT) tax of &.2L and

a state !ontribution rate of $.4L. No0ever@ be!ause of stable employment experien!e@ t'e!ompanyCs state rate 'as been redu!ed to 2L. ?'at is t'e total amount of federal andstate unemployment tax for Timmons %o.a. $*@$b. 41@!. 2@d. 14@

(3. nru' %o.@ 0'i!' 'as a taxable payroll of 4@@ is sub:e!t to FT) tax of &.2L and astate !ontribution rate of $.4L. No0ever@ be!ause of stable employment experien!e@ t'e!ompanyCs state rate 'as been redu!ed to 2L. ?'at is t'e total amount of federal andstate unemployment tax for nru' %o.

a. 4&@*b. 32@*!. 1&@d. 11@2

13 - 1:


17/37


(4. ) !ompany gives ea!' of its $ employees


18/37


((. ?'at is t'e amount of expense relative to !ompensated absen!es t'at s'ould be reportedon imsonCs in!ome statement for 2&a. .b. &*@**.!. ($@&.d. (2@24.

(*. ?'at is t'e amount of t'e a!!rued liability for !ompensated absen!es t'at s'ould bereported at De!ember 31@ 2*a. ,4@,2.b. ,@(2.!. (,@*.d. ,$@(&.

(,. ) !ompany offers a !as' rebate of 1 on ea!' 4 pa!+age of lig't bulbs sold during 2(.Nistori!ally@ 1L of !ustomers mail in t'e rebate form. During 2(@ 4@@ pa!+agesof lig't bulbs are sold@ and 14@ 1 rebates are mailed to !ustomers. ?'at is t'erebate expense and liability@ respe!tively@ s'o0n on t'e 2( finan!ial statements datedDe!ember 31a. 4@I 4@b. 4@I 2&@!. 2&@I 2&@d. 14@I 2&@

*. ) !ompany buys an oil rig for 1@@ on Manuary 1@ 2(. T'e life of t'e rig is 1years and t'e expe!ted !ost to dismantle t'e rig at t'e end of 1 years is 2@


19/37


*3. ) !ompany buys an oil rig for 2@@ on Manuary 1@ 2(. T'e life of t'e rig is 1years and t'e expe!ted !ost to dismantle t'e rig at t'e end of 1 years is 4@


20/37


*(. #ryor Frosted Fla+es %ompany offers its !ustomers a pottery !ereal bo0l if t'ey send in 4boxtops from #ryor Frosted Fla+es boxes and 1.. T'e !ompany estimates t'at &L of t'e boxtops 0ill be redeemed. n 2(@ t'e !ompany sold $@ boxes of FrostedFla+es and !ustomers redeemed 22@ boxtops re!eiving $$@ bo0ls. f t'e bo0ls!ost #ryor %ompany 2.$ ea!'@ 'o0 mu!' liability for outstanding premiums s'ould bere!orded at t'e end of 2(a. 2@b. 3@!. $@d. (@

se t'e follo0ing information for 8uestions **@ *,@ and ,.

>ent %o. in!ludes one !oupon in ea!' bag of dog food it sells. n return for eig't !oupons@!ustomers re!eive a leas'. T'e leas'es !ost >ent 2. ea!'. >ent estimates t'at 4 per!ent of t'e !oupons 0ill be redeemed. Data for 2& and 2( are as follo0sA

2& 2(ags of dog food sold $@ &@5eas'es pur!'ased 1*@ 22@%oupons redeemed 12@ 1$@

**. T'e premium expense for 2& isa. [email protected]. 3@.!. [email protected]. $@.

*,. T'e estimated liability for premiums at De!ember 31@ 2& isa. (@$.b. 1@.

!. 1(@$.d. 2@.

,. T'e estimated liability for premiums at De!ember 31@ 2( isa. 11@2$.b. 21@2$.!. 22@$.d. 42@$.

,1. ernon %o. is being sued for illness !aused to lo!al residents as a result of negligen!e ont'e !ompanys part in permitting t'e lo!al residents to be exposed to 'ig'ly toxi!!'emi!als from its plant. ernons la0yer states t'at it is probable t'at ernon 0ill lose t'e

suit and be found liable for a :udgment !osting ernon any0'ere from 1@2@ to&@@. No0ever@ t'e la0yer states t'at t'e most probable !ost is 3@&@. )s aresult of t'e above fa!ts@ ernon s'ould a!!ruea. a loss !ontingen!y of 1@2@ and dis!lose an additional !ontingen!y of up to

4@*@.b. a loss !ontingen!y of 3@&@ and dis!lose an additional !ontingen!y of up to

2@4@.!. a loss !ontingen!y of 3@&@ but not dis!lose any additional !ontingen!y.d. no loss !ontingen!y but dis!lose a !ontingen!y of 1@2@ to &@@.

13 - /?


21/37


,2. 7oore %ompany estimates its annual 0arranty expense as 4L of annual net sales. T'efollo0ing data relate to t'e !alendar year 2(A

"et sales 1@$@?arranty liability a!!ount

alan!e@ De!. 31@ 2( 1@ debit before ad:ustment

alan!e@ De!. 31@ 2( $@ !redit after ad:ustment?'i!' one of t'e follo0ing entries 0as made to re!ord t'e 2( estimated 0arrantyexpensea. ?arranty Expense .............................................................. &@

etained Earnings


22/37


,$. Norton Food %ompany distributes to !onsumers !oupons 0'i!' may be presented


23/37


24/37


13. n!luded in auder %orp.s liability a!!ount balan!es at De!ember 31@ 2&@ 0ere t'efollo0ingA

(L note payable issued G!tober 1@ 2&@ maturing eptember 3@ 2( 2$@*L note payable issued )pril 1@ 2&@ payable in six e8ual annual

installments of 1$@ beginning )pril 1@ 2( &@

auder s De!ember 31@ 2& finan!ial statements 0ere issued on 7ar!' 31@ 2(. GnManuary 1$@ 2(@ t'e entire &@ balan!e of t'e *L note 0as refinan!ed byissuan!e of a long-term obligation payable in a lump sum. n addition@ on 7ar!' 1@ 2(@auder !onsummated a non!an!elable agreement 0it' t'e lender to refinan!e t'e (L@2$@ note on a long-term basis@ on readily determinable terms t'at 'ave not yet beenimplemented. Gn t'e De!ember 31@ 2& balan!e s'eet@ t'e amount of t'e notes payablet'at auder s'ould !lassify as s'ort-term obligations isa. 1([email protected]. 12$@.!. [email protected]. .

14. arr %ompanyCs salaried employees are paid bi0ee+ly. G!!asionally@ advan!es made toemployees are paid ba!+ by payroll dedu!tions. nformation relating to salaries for t'e!alendar year 2( is as follo0sA

12;31;& 12;31;(Employee advan!es 12@ 1*@

)!!rued salaries payable &$@ alaries expense during t'e year &$@alaries paid during t'e year


25/37


1&. Dexter %o. sells ma:or 'ouse'old applian!e servi!e !ontra!ts for !as'. T'e servi!e!ontra!ts are for a one-year@ t0o-year@ or t'ree-year period. %as' re!eipts from !ontra!tsare !redited to unearned servi!e !ontra!t revenues. T'is a!!ount 'ad a balan!e of 4*@ at De!ember 31@ 2& before year-end ad:ustment. ervi!e !ontra!t !osts are!'arged as in!urred to t'e servi!e !ontra!t expense a!!ount@ 0'i!' 'ad a balan!e of 12@ at De!ember 31@ 2&. Gutstanding servi!e !ontra!ts at De!ember 31@ 2&expire as follo0sA

During 2( During 2* During 2,1@ 1&@ (@

?'at amount s'ould be reported as unearned servi!e !ontra!t revenues in DextersDe!ember 31@ 2& balan!e s'eeta. 3&@.b. 33@.!. [email protected]. 22@.

1(. tley Trading tamp %o. re!ords stamp servi!e revenue and provides for t'e !ost of

redemptions in t'e year stamps are sold to li!ensees. tleys past experien!e indi!atest'at only *L of t'e stamps sold to li!ensees 0ill be redeemed. tleys liability for stampredemptions 0as (@$@ at De!ember 31@ 2$. )dditional information for 2& is asfollo0sA

tamp servi!e revenue from stamps sold to li!ensees $@@%ost of redemptions 3@4@

f all t'e stamps sold in 2& 0ere presented for redemption in 2(@ t'e redemption !ost0ould be 2@$@. ?'at amount s'ould tley report as a liability for stamp redemptionsat De!ember 31@ 2&a. ,@[email protected]. &@&@.

!. &@[email protected]. 4@1@.

1*. 5ett %o. 'as a probable loss t'at !an only be reasonably estimated 0it'in a range of out!omes. "o single amount 0it'in t'e range is a better estimate t'an any ot'er amount.T'e loss a!!rual s'ould bea. /ero.b. t'e maximum of t'e range.!. t'e mean of t'e range.d. t'e minimum of t'e range.

1,. During 2&@ lass %o. introdu!ed a ne0 produ!t !arrying a t0o-year 0arranty against

defe!ts. T'e estimated 0arranty !osts related to dollar sales are 2L 0it'in 12 mont'sfollo0ing sale and 4L in t'e se!ond 12 mont's follo0ing sale. ales and a!tual 0arrantyexpenditures for t'e years ended De!ember 31@ 2& and 2( are as follo0sA

)!tual ?arranty ales Expenditures

2& *@ 12@2( 1@@ 3@

1@*@ 42@

)t De!ember 31@ 2(@ lass s'ould report an estimated 0arranty liability of

13 - /9


26/37


a. .b. 1@.!. [email protected]. &&@.

11. n 7ar!' 2(@ an explosion o!!urred at No0e %o.s plant@ !ausing damage to area

properties. y 7ay 2(@ no !laims 'ad yet been asserted against No0e. No0ever@No0es management and legal !ounsel !on!luded t'at it 0as reasonably possible t'atNo0e 0ould be 'eld responsible for negligen!e@ and t'at 4@@ 0ould be areasonable estimate of t'e damages. No0es $@@ !ompre'ensive publi! liabilitypoli!y !ontains a 4@ dedu!tible !lause. n No0es De!ember 31@ 2& finan!ialstatements@ for 0'i!' t'e auditors field0or+ 0as !ompleted in )pril 2(@ 'o0 s'ould t'is!asualty be reporteda. )s a note dis!losing a possible liability of 4@@.b. )s an a!!rued liability of 4@.!. )s a note dis!losing a possible liability of [email protected]. "o note dis!losure of a!!rual is re8uired for 2& be!ause t'e event o!!urred in 2(.

%ult$ple C,o$ce An!e"—CPA A)apte)

Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An#

1. a 12. ! 14. a 1&. b 1*. d 11. !11. b 13. d 1$. d 1(. ! 1,. d

DERI2ATIONS — Co(putat$onal

No# An!e" De"$8at$on

&3. b 1$2@2$ Q 1$@ B 2@2$.2@2$ R 2;3 B 1@4(.

&4. d 3@ S


27/37


DERI2ATIONS — Co(putat$onal cont#.

No# An!e" De"$8at$on(3. d U


28/37


DERI2ATIONS — Co(putat$onal cont#.

No# An!e" De"$8at$on

4@ ($@ &1@

,&. ! HHHHHHHHHHHHH B 1.1( to 1.12@

6,(. ! B W&@ Q U


29/37


E0ERCISES

E@# 13-111H"otes payable.

Gn )ugust 31@ 9rant %o. partially refunded 1*@ of its outstanding 1L note payable madeone year ago to )rma tate an+ by paying 1*@ plus 1*@ interest@ 'aving obtained t'e1,*@ by using $2@4 !as' and signing a ne0 one-year 1&@ note dis!ounted at ,L byt'e ban+.

Int"uct$on


30/37


Solut$on 13-11/


31/37


E@# 13-11

2. ) suit for brea!' of !ontra!t see+ing damages of 2@4@ 0as filed by an aut'or againstEarly %o. on G!tober 4@ 2(. Earlys legal !ounsel believes t'at an unfavorable out!ome isprobable. ) reasonable estimate of t'e a0ard to t'e plaintiff is bet0een &@ and1@*@. "o amount 0it'in t'is range is a better estimate of potential damages t'an any

ot'er amount.

3. #eete is involved in a pending !ourt !ase. #eeteCs la0yers believe it is probable t'at #eete0ill be a0arded damages of 1@@.

Int"uct$onDis!uss t'e proper a!!ounting treatment@ in!luding any re8uired dis!losures@ for ea!' situation.9ive t'e rationale for your ans0ers.

Solut$on 13-11

1. ooney %o. s'ould dis!lose in t'e notes to t'e finan!ial statements t'e existen!e of apossible !ontingent liability related to t'e la0 suit. T'e note s'ould indi!ate t'e range of t'epossible loss. T'e !ontingent liability s'ould not be a!!rued be!ause t'e loss is notprobable.

2. T'e probable a0ard s'ould be a!!rued by a !'arge to an estimated loss and a !redit to anestimated liability of &@. Early %o. s'ould dis!lose t'e follo0ing in t'e notes to t'efinan!ial statementsA t'e amount of t'e suit@ t'e nature of t'e !ontingen!y@ t'e reason for t'ea!!rual@ and t'e range of t'e possible loss.

T'e a!!rual is made be!ause it is probable t'at a liability 'as been in!urred and t'e amountof t'e loss !an be reasonably estimated. T'e lo0est amount of t'e range of possible losses

is used 0'en no amount is a better estimate t'an any ot'er amount.

3. #eete s'ould not re!ord t'e gain !ontingen!y until itCs reali/ed. sually@ gain !ontingen!iesare neit'er a!!rued nor dis!losed. T'e 1@@ gain !ontingen!y s'ould be dis!losedonly if t'e probability t'at it 0ill be reali/ed is very 'ig'.

E@# 13-119H#remiums.

Farley 7usi! 'op gives its !ustomers !oupons redeemable for a poster plus a Dixie %'i!+s %D.Gne !oupon is issued for ea!' dollar of sales. Gn t'e surrender of 1 !oupons and $. !as'@t'e poster and %D are given to t'e !ustomer. t is estimated t'at *L of t'e !oupons 0ill be

presented for redemption. ales for t'e first period 0ere (@@ and t'e !oupons redeemedtotaled 34@. ales for t'e se!ond period 0ere *4@@ and t'e !oupons redeemed totaled*$@. Farley 7usi! 'op boug't 2@ posters at 2.;poster and 2@ %Ds at &.;%D.

Int"uct$on#repare t'e follo0ing entries for t'e t0o periods@ assuming all t'e !oupons expe!ted to beredeemed from t'e first period 0ere redeemed by t'e end of t'e se!ond period.

13 - 31


32/37


E@# 13-119

Entry #eriod 1 #eriod 2


33/37


;E@# 13-11


34/37


35/37


P"# 13-11>

Manuary 2&A 4@ s'ares of !ommon sto!+ 0ere issued for 3$@. 3@ of t'epro!eeds 0as used to li8uidate t'e note payable to T'ird "ational an+.

February 1A T'e finan!ial statements for 2& 0ere issued.

Int"uct$on#repare a partial balan!e s'eet for 7anning %orporation@ s'o0ing t'e manner in 0'i!' t'e aboveliabilities s'ould be presented at De!ember 31@ 2&. T'e liabilities s'ould be properly !lassifiedbet0een !urrent and long-term@ and appropriate note dis!losure s'ould be in!luded.

Solut$on 13-11>

%urrent liabilitiesADividends payable on !ommon sto!+ &@"otes payableH )dmire tate an+ 4(@%urrently maturing portion of serial bonds 2$@

Total !urrent liabilities (*@

5ong-term debtA"ote payableHT'ird "ational an+@ refinan!ed in

Manuary@ 2(H"ote 1 3@erial bonds not maturing !urrently ($@

Total long-term debt 1@$@Total liabilities 1@*3@

"ote 1A Gn Manuary 2&@ 2(@ t'e !orporation issued 4@ s'ares of !ommon sto!+ andre!eived pro!eeds totaling 3$@@ of 0'i!' 3@ 0as used to li8uidate a note payable t'atmatured on Manuary 2(@ 2(. )!!ordingly@ su!' note payable 'as been !lassified as long-termdebt at De!ember 31@ 2&.

P"# 13-1/?H#remiums.

Tangy %andy %ompany offers a !offee mug as a premium for every ten $-!ent !andy bar 0rappers presented by !ustomers toget'er 0it' 1.. T'e pur!'ase pri!e of ea!' mug to t'e!ompany is , !entsI in addition it !osts & !ents to mail ea!' mug. T'e results of t'e premiumplan for t'e years 2& and 2( are as follo0s


36/37


Solut$on 13-1/?


37/37


P"# 13-1/1H?arranties.

Mames E8uipment %ompany sells !omputers for 1@$ ea!' and also gives ea!' !ustomer a 2-year 0arranty t'at re8uires t'e !ompany to perform periodi! servi!es and to repla!e defe!tiveparts. During 2&@ t'e !ompany sold ( !omputers. ased on past experien!e@ t'e !ompany'as estimated t'e total 2-year 0arranty !osts as 3 for parts and & for labor.

ch13 current liabilities and contingencies 2

Documents