Ch13 Current Liabilities and Contingencies

CHAPTER 13 CURRENT LIABILITIES AND CONTINGENCIES

TRUE-FALSE—Conceptual An!e" F F T T F F T F T F T F T F T T F F F T

No# 1. 2. 3. 4. $. &. (. *. ,. 1. 11. 12. 13. 14. 1$. 1&. 1(. 1*. 1,. 2.

Dec"$pt$on Zero-interest-bearing note payable. Dividends in arrears. Examples of unearned revenues. eporting dis!ount on "otes #ayable. %urrently maturing long-term debt. Ex!luding s'ort-term debt refinan!ed. )!!ounting for sales tax !olle!ted. )!!ounting for si!+ pay. o!ial se!urity taxes as liabilities. Definition of a!!umulation rig'ts. e!ogni/ing !o !ompensated absen!es expense. )!!ruing estimated loss !ontingen!y. Dis!losing gain !ontingen!ies. ales-type 0arranty profit. Fair value of asset retirement obligation. eporting a litigation liability. Expense 0arranty approa!'. )!id-test ratio !omponents. )ffe!t on !urrent ratio. eporting !urrent liabilities.

%ULTIPLE CHOICE—Conceptual An!e" d d a a b d ! d ! d ! d d d d a

No# 21. 22. 23. 24. 2$. 2&. 2(. 2*. 2,. 3. 31. 32. 33. 34. 3$. 3&.

Dec"$pt$on Definition of a liability. "ature of !urrent liabilities. e!ording of a!!ounts payable. %lassifi!ation of notes payable. %lassifi!ation of of di dis!ounts on on no notes pa payable. dentify !urrent liability. onds reported as !urrent liability. dentify item 0'i!' is not a !urrent liability. Dividends reported as !urrent liability. %lassifi!ation of of st sto!+ di dividends di distributable. dentify ititem 0'i!' is is not a !u !urrent liliability. dentify !urrent liability. 'ort-term obligations expe!ted to be refinan!ed. )bility to !onsummate ref refinan!ing of s'ort-term obligations ons. Determine 0'at is a liability. %lassifi!ation of sales taxes.

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13 - /

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

%ULTIPLE CHOICE—Conceptual cont#. An!e" d b d d d ! d d d b a ! d b ! ! ! a b d d ! a d d d

No# 3(. 3(.  3*. 3*. # 3,. 3,. 4. 41. 42. 43. 44. 4$. 4&. 4(. 4*. 4,. $. $1. $2. $3. $4. # $$. $$.  $&. $&.  $(. $(.  $*. $*. # $,. $,. &. &1. 6&2. 

Dec"$pt$on Dis! Dis!lo losu sure re for for s'ort s'ort-t -ter erm m debt debt refin refinan an!e !ed. d. est ested ed rig rig't 'ts s vs. vs. a!!u a!!umu mula late ted d rig' rig'ts ts.. Dedu Dedu!t !tio ions ns in !omp !omput utin ing g net net pay pay. Employers payroll tax expense. )!!rual of a liability for !ompensated absen!es. )!!rual of a liability for !ompensated absen!es. )!!rual of a liability for !ompensated absen!es. Dis!losure of a gain !ontingen!y. Dis!losure of !ontingen!ies. )!!rual of loss !ontingen!y. 5itigation and loss !ontingen!ies. )!!rual of a !ontingent liability. our!e of a !ontingent liability. )sset retirement obligation. )sset retirement obligation. %lassifi!ation of 0arranty liability. 5iability a! a!!rual du due to to governmental a! a!tion. )!!rual of produ!t 0arranties. Dete Determ rmin inin ing g los loss s amou amount nt to repo report rt.. epo eport rtin ing g la0s la0sui uitt loss loss and and lia liabi bilility ty.. )!!r )!!rua uall met met'o 'od d for for 0arra 0arrant nty y !os !osts ts.. #res #resen enta tati tion on of of !ur !urre rent nt lia liabi bililiti ties es.. %urre urrent nt rat ratio form formul ula. a. Dis!losure of a!!rued liabilities. )!id-test ratio elements. 7et'ods of !al!ulating employee bonuses.

#

T'ese 8uestions also appear in t'e #roblem-olving urvival 9uide. T'ese 8uestions also appear in t'e tudy 9uide. 6T'is topi! is dealt 0it' in an )ppendix to t'e !'apter.



%ULTIPLE CHOICE—Co(putat$onal An!e" b d b d b b !

No# &3. &4. &$. &&. &(. &*. &,.

Dec"$pt$on )d:usting entry involving dis!ount on s'ort-term note payable. %al!ulate effe!tive interest on dis!ounted note. Determine amount of s'ort-term debt to be reported. Determine amount of s'ort-term debt to be reported. %al!ulate sales taxes for t'e mont'. %al!ulate amount of sales taxes payable. Determine amount of sales sub:e!t to sales tax.















%urrent 5iabilities and %ontingen!ies

13 - 3

%ULTIPLE CHOICE—Co(putat$onal cont#. An!e" d a b d a b d d b d b d d d b d a d b ! ! ! b

No# ((. (*. (*. (,. *. *1. *2. *3. *4. *$. *&. *(. **. *,. ,. ,1. ,2. ,3. ,4. ,$. ,&. 6,(. 6,*. 6,,.

Dec"$pt$on %al!ulation of va!ation expense to be re!ogni/ed. %al!u al!ula lati tion on of a!!r a!!rue ued d liabi iabili lity ty to be re!o re!ogn gnii/ed /ed for !omp !ompen ens sated ated bal balan!e an!es s. %al!ulate rebate ex expense an and liliability. )sset retirement obligation. %al!ulate insuran!e expense and loss. %al!ulate rebate ex expense an and liliability. )sset retirement obligation. %al!ulate 0arranty liability. %al!ulate liability for premiums. %al!ulate 0arranty liability. %al!ulate liability for premiums. Determine premiums expense fo for t'e year. %al!ulate estimated liliability fo for pr premiums. %al!ulate estimated liliability fo for pr premiums. Determine amount to a!!rue as a loss !ontingen!y. )!!rue 0arranty expense for t'e year. %al!ulate 0arranty liability. Determine amount to a!!rue as a gain !ontingen!y. %al!ulate liability for unredeemed !oupons. %al!ulate t'e 8ui!+
%ULTIPLE CHOICE—CPA A)apt A)apte) e) An!e" a b ! d a d b ! d d !

No# 1. 11. 12. 13. 14. 1$. 1&. 1(. 1*. 1,. 11.

Dec"$pt$on >no0ledge of a!!ounts payable. Determine !urrent and lo long-term portions of debt. Determine a!!rued interest payable. Determine am amount of of s' s'ort-term de debt to to be be re reported. %al!ulate a!!rued salaries payable. )!!rual of payroll taxes. %al!ulate unearned servi!e !ontra!t revenue. Determine liliability fr from un unredeemed tr trading st stamps. Determine range of loss a!!rual. %al!ulate t'e estimated 0arranty liability. Dis!losure of of a !asualty !laim.

E0ERCISES I te (

Dec"$pt$on
















13 - 

PROBLE%S I te ( #13-11* #13-11, #13-12 #13-121

Dec"$pt$on )!!ounts and notes payable. efinan!ing of s'ortrt-term debt. #remiums. ?arranties.

CHAPTER LEARNING OBECTI2ES 1.

Des!ri Des!ribe be t'e t'e nature nature@@ type@ type@ and and valua valuatio tion n of !urre !urrent nt liabi liabilit lities ies..

2.

Explain Explain t'e t'e !lassif !lassifi!ati i!ation on issues issues of s'ort-t s'ort-term erm debt expe!ted expe!ted to to be refinan!ed. refinan!ed.

3.

denti dentify fy types types of employ employee-r ee-rela elated ted liabil liabiliti ities. es.

4.

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

$.

Explai Explain n t'e a!!ou a!!ounti nting ng for diff differe erent nt types types of of loss loss !ontin !ontingen gen!ie !ies. s.

&.

ndi!a ndi!ate te 'o0 to to present present and and analy analy/e /e liabil liabiliti ities es and !ont !onting ingen! en!ies ies..

6(.

%omput %ompute e emplo employee yee bonuse bonuses s under under differ differing ing arrang arrangeme ements nts..
















13 - 9

SU%%AR4 SU%%AR4 OF LEARNING OBECTI2ES B4 5UESTIONS Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

Item

Type

7% 7% 7% 7%

12. 111. 11*.

7% E #

7% 7% 7%

13. 11,.

7% #

7% 7% 7% 7%

112. 113.

E E

7% 7% 7% 7% 7% 7%

1(. 1*. 1,. 11. 11$. 11&.

7% 7% 7% 7% E E

# #

12.

#

Item

Type

12. 121.

# #

Lea"n$n* O67ect$8e 1

1. 2. 3. 4.

TF TF TF TF

21. 22. 23. 24.

7% 7% 7% 7%

$. &. (.

TF TF TF

33. 34. 3$.

7% 7% 7%

*. ,. 1. 11.

TF TF TF TF

3$. 3*. # 3,. 4.

7% 7% 7% 7%

41. 42. 43. (2.

12. 13.

TF TF

3$. 44.

7% 7%

4$. 4&.

14. 1$. 1&. 1(. $. $1.

TF TF TF TF 7% 7%

$2. $3. $4. # $$.  $&.  $(.

7% 7% 7% 7% 7% 7%

(,. *. *1. *2. *3. *4.

1*. 1,.

TF TF

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TF 7%

&2.

7%

,(.

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"oteA





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

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TF B True-False 7% B 7ultiple %'oi!e

$,. &. ,*.

7% 2,. 7% &3. 7% 3. 7% &4. 7% 31. 7% 1. 7% 32. 7% 11. Lea"n$n* O67ect$8e / 7% &&. 7% &,. 7% &(. 7% (. 7% &*. 7% (1. Lea"n$n* O67ect$8e 3 7% (3. 7% ((. 7% (4. 7% (*. 7% ($. 7% 14. 7% (&. 7% 1$. Lea"n$n* O67ect$8e  7% 4(. 7% 4,. 7% 4*. 7% 114. Lea"n$n* O67ect$8e 9 7% *$. 7% ,1. 7% *&. 7% ,2. 7% *(. 7% ,3. 7% **. 7% ,4. 7% *,. 7% ,$. 7% ,. 7% 1&. Lea"n$n* O67ect$8e : 7% &1. 7% 11*. 7% ,&. 7% 11,. Lea"n$n* O67ect$8e ;< 7% ,,. 7% 11(. E B Exer!ise # B #roblem

7% E

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13 - :


TRUE-FALSE—Conceptual 1. ) /ero-interest-bearing note payable payable t'at is issued issued at a dis!ount 0ill not result in any interest expense being re!ogni/ed. 2. Dividends in arrears on !umulative !umulative preferred sto!+ s'ould be re!orded as a !urrent liability. 3. 7aga/ine 7aga/ine subs!riptions subs!riptions and airline airline ti!+et sales sales bot' result result in unearned revenues. revenues. 4. Dis!ount on "otes #ayable is a !ontra a!!ount to "otes #ayable on t'e balan!e s'eet. $. )ll long-term long-term debt maturing maturing 0it'in 0it'in t'e next year must be !lassified !lassified as a !urrent liability liability on t'e balan!e s'eet. &. ) s'ort-ter s'ort-term m obligation obligation !an be ex!luded ex!luded from !urrent !urrent liabilities liabilities if t'e !ompany intends intends to refinan!e it on a long-term basis. (. 7any !ompanies !ompanies do not segregate segregate t'e sales sales tax !olle!ted !olle!ted and t'e amount of t'e sale sale at t'e time of t'e sale. *. ) !ompany must a!!rue a liability for si!+ pay t'at a!!umulates but does not vest. vest. ,. %ompanies %ompanies report report t'e amount of so!ial so!ial se!urity taxes taxes 0it''eld 0it''eld from employees employees as 0ell 0ell as t'e !ompaniesC mat!'ing portion as !urrent liabilities until t'ey are remitted. 1. )!!umu )!!umulat lated ed rig'ts exist exist 0'en an employ employer er 'as an obliga obligatio tion n to ma+e payment payment to an employee even after terminating 'is employment. 11. 11. %ompanies s'ould re!ogni/e re!ogni/e t'e expense expense and related liability liability for !ompensated !ompensated absen!es in in t'e year earned by employees. 12. %ompanies s'ould a!!rue a!!rue an estimated loss from a loss !ontingen!y ifif information available available prior to t'e issuan!e of finan!ial statements indi!ates t'at it is probable t'at a liability 'as been in!urred. 13. ) !ompany !ompany dis!loses dis!loses gain !ontingen!ie !ontingen!ies s in t'e notes only 0'en a 'ig' probability probability exists for reali/ing t'em. 14. T'e expe!te expe!ted d profit profit from a sales sales type 0arranty 0arranty t'at !overs !overs several several years s'ould s'ould all be re!ogni/ed in t'e period t'e 0arranty is sold. 1$. T'e fair value value of an asset asset retireme retirement nt obligati obligation on is re!orded re!orded as bot' bot' an in!rease in!rease to t'e related asset and a liability. 1&. T'e !ause !ause for litigation litigation must 'ave o!!urred o!!urred on or before t'e date of t'e finan!ia finan!iall statements statements


















13 - <

1*. #repai #repaid d insura insuran!e n!e s'ould s'ould be in!lud in!luded ed in t'e numerato numeratorr 0'en 0'en !omput !omputing ing t'e a!id-t a!id-test est <8ui!+= ratio. 1,. #aying a !urrent liability 0it' !as' 0ill al0ays redu!e t'e !urrent ratio. 2. %urren %urrentt liabil liabiliti ities es are usually usually re!ord re!orded ed and reported reported in finan! finan!ial ial statemen statements ts at t'eir t'eir full full maturity value.

T"ue T"ue Fale An!e"— Conceptual Ite(

An#

Ite(

An#

Ite(

An#

Ite(

1. 2. 3. 4. $.

F F T T F

&. (. *. ,. 1.

F T F T F

11. 12. 13. 14. 1$.

T F T F T

1&. 1(. 1*. 1,. 2.

An#

T F F F T

%ULTIPLE CHOICE—Conceptual 21.

5iabilities ar are a. any a!!ounts a!!ounts 'aving 'aving !redit !redit balan! balan!es es after after !losing !losing entries entries are made. made. b. defe deferr rred ed !red !redit its s t'at t'at are are re!og re!ogni ni/e /ed d and and meas measure ured d in !onf !onfor ormi mity ty 0it' it' gene genera ralllly y a!!epted a!!ounting prin!iples. !. obligations obligations to to transfer transfer o0ners'i o0ners'ip p s'ares to to ot'er ot'er entities entities in t'e t'e future. future. d. obligations obligations arising arising from past past transa!tions transa!tions and and payable in assets assets or servi!e servi!es s in t'e future. future.

22. 22.

?'i! ?'i!' ' of t'e t'e foll follo0 o0in ing g is a !urr !urren entt liab liabililit ity y a. ) long-ter long-term m debt maturing maturing !urrent !urrently ly@@ 0'i!' 0'i!' is to be paid 0it' 0it' !as' in a sin+ing sin+ing fund fund b. ) long-ter long-term m debt maturing maturing !urrently !urrently@@ 0'i!' 0'i!' is to be retired retired 0it' pro!eeds pro!eeds from a ne0

















13 - =


24. 24.

)mon )mong g t'e t'e s'ort s'ort-t -ter erm m obliga obligati tion ons s of 5an!e 5an!e %ompa %ompany ny as of De!em De!embe berr 31@ 31@ t'e t'e bala balan! n!e e s'eet date@ are notes payable totaling 2$@ 0it' 0it' t'e 7adison "ational an+. an+. T'ese are ,-day notes@ rene0able rene0able for anot'er ,-day period. T'ese notes s'ould be !lassified on t'e balan!e s'eet of 5an!e %ompany as a. !urre !urrent nt liab liabililit itie ies. s. b. defe deferr rred ed !'a !'arg rges es.. !. long long-te -term rm liab liabililit itie ies. s. d. inte interm rmed edia iate te debt debt..

2$. 2$.

?'i! ?'i!' ' of t'e t'e foll follo0 o0in ing g is is not true true about t'e dis!ount on s'ort-term notes payable a. T'e Dis!ou Dis!ount nt on "otes "otes #ayabl #ayable e a!!ount a!!ount 'as a debit debit balan!e. balan!e. b. T'e T'e Dis! Dis!ou ount nt on "ote "otes s #aya #ayabl ble e a!!o a!!oun untt s'ou s'ould ld be repo report rted ed as an asset asset on t'e balan!e s'eet. !. ?'en ?'en t'ere is a dis!ount dis!ount on a note note payable@ payable@ t'e effe! effe!tiv tive e interest interest rate rate is 'ig'er 'ig'er t'an t'an t'e stated dis!ount rate. d. )ll )ll of of t'e t'ese se are are tru true. e.

2&.

?'i!' ?'i!' of t'e follo0 follo0ing ing may be a !urren !urrentt liab liabili ility ty  a. ?it' ?it''e 'eld ld n!o n!ome me Ta Taxes xes b. Deposi Deposits ts e!e e!eive ived d from from %ust %ustome omers rs !. Defe Deferr rred ed eve evenu nue e d. )ll of of t' t'ese

2(.

?'i!' ?'i!' of of t'e t'e foll follo0i o0ing ng items items is a !urren !urrentt liabi liabilit lity y a. onds
2*.

?'i ?'i!' of t'e t'e fol follo0i o0ing s'ould not be in!luded in t'e !urrent liabilities se!tion of t'e balan!e s'eet a. Trad Trade e not notes es paya payabl ble e


















13 - >

31.

Gf t'e follo0ing follo0ing items@ items@ t'e only only one 0'i!' 0'i!' s'ould s'ould not be be !lassifi !lassified ed as a !urrent !urrent liability liability is a. !urrent !urrent maturi maturitie ties s of long-t long-term erm debt debt.. b. sale sales s tax taxes es paya payabl ble. e. !. s'ort-term s'ort-term obligations obligations expe!ted expe!ted to be refina refinan!ed. n!ed. d. unea unearn rned ed reve revenu nues es..

32.

)n a!!ou a!!ount nt 0'i! 0'i!' ' 0ould 0ould be be !lass !lassifi ified ed as a !urren !urrentt liabi liabilit lity y is a. divide dividends nds payab payable le in t'e !ompa !ompany nys s sto!+. sto!+. b. a!!oun a!!ounts ts paya payable bleHde Hdebit bit bala balan!e n!es. s. !. loss losses es expe expe!t !ted ed to be in!u in!urre rred d 0it'i 0it'in n t'e t'e next next t0elv t0elve e mont mont's 's in ex!e ex!ess ss of t'e !ompanys insuran!e !overage. d. none none of t'e t'es se.

33.

?'i!' ?'i!' of t'e follo0 follo0ing ing statem statement ents s is !orre! !orre!t t a. ) !ompany !ompany may ex!lude ex!lude a s'orts'ort-ter term m obliga obligatio tion n from from !urren !urrentt liabil liabiliti ities es if t'e firm intends to refinan!e t'e obligation on a long-term basis. b. ) !ompany !ompany may may ex!lude ex!lude a s'ort-term s'ort-term obligati obligation on from !urrent !urrent liabiliti liabilities es if t'e firm firm !an demonstrate an ability to !onsummate a refinan!ing. !. ) !ompany !ompany may ex!lud ex!lude e a s'ort-te s'ort-term rm obligat obligation ion from !urrent !urrent liabil liabiliti ities es if it is paid paid off off after t'e balan!e s'eet date and subse8uently repla!ed by long-term debt before t'e balan!e s'eet is issued. d. "one one of of t'e t'ese se..

34. 34.

T'e T'e abil ability ity to !onsu !onsumm mmat ate e t'e t'e refi refina nan! n!in ing g of a s'ort s'ort-t -ter erm m obli obliga gati tion on may be demo demonnstrated by a. a!tual a!tually ly refinan! refinan!ing ing t'e obligati obligation on by issuin issuing g a long-te long-term rm obligati obligation on after t'e date of t'e balan!e s'eet but before it is issued. b. enteri entering ng into a finan! finan!ing ing agreemen agreementt t'at t'at permit permits s t'e enterpri enterprise se to refina refinan!e n!e t'e debt on a long-term basis. !. a!tual a!tually ly refinan! refinan!ing ing t'e obligati obligation on by issuin issuing g e8uity e8uity se!urit se!urities ies after after t'e date of t'e balan!e s'eet but before it is issued. d. all all of of t'es t'ese. e.

3$. 3$.

?'i! ?'i!' ' of of t'e t'e fol follo lo0i 0ing ng sta state teme ment nts s is is false? a. ) !ompany !ompany may ex!lude ex!lude a s'orts'ort-ter term m obliga obligatio tion n from from !urren !urrentt liabil liabiliti ities es if t'e firm

















13 - 1?




3(.

f a s'ort-te s'ort-term rm obligat obligation ion is ex!lud ex!luded ed from !urrent !urrent liabi liabilit lities ies be!aus be!ause e of refina refinan!i n!ing@ ng@ t'e footnote to t'e finan!ial statements des!ribing t'is event s'ould in!lude all of t'e follo0ing information except a. a general general des!riptio des!ription n of t'e finan!ing finan!ing arrange arrangement. ment. b. t'e terms terms of t'e ne0 obligation obligation in!urre in!urred d or to be in!urred. in!urred. !. t'e terms terms of any any e8uity e8uity se!uri se!urity ty issued issued or or to be issued. issued. d. t'e number number of finan!ing finan!ing institu institutions tions t'at t'at refused refused to refinan! refinan!e e t'e debt@ if any any..



3*. 3*.

n a!!oun a!!ounti ting ng for for !omp !ompen ensa sate ted d abse absen! n!es es@@ t'e t'e diff differ eren en!e !e bet0 bet0ee een n vest vested ed rig'ts rig'ts and a!!umulated rig'ts is a. vested vested rig'ts rig'ts are normall normally y for a longer longer period period of employ employmen mentt t'an t'an are a!!umula a!!umulated ted rig'ts. b. vested vested rig'ts rig'ts are not not !ontingent !ontingent upon upon an employe employees es future future servi!e. servi!e. !. vested vested rig'ts are are a legal and binding binding obligation obligation on t'e !ompany !ompany@@ 0'ereas 0'ereas a!!umulat a!!umulated ed rig'ts expire at t'e end of t'e a!!ounting period in 0'i!' t'ey arose. d. vest vested ed rig' rig'ts ts !arr !arry y a stip stipul ulat ated ed doll dollar ar amou amount nt t'at t'at is o0ed o0ed to t'e t'e empl employ oyee eeII a!!umulated rig'ts do not represent monetary !ompensation.

#

3,.

)n employe employees es net net
4.

?'i ?'i!' of t'ese is not in!luded in!luded in an employers payroll tax expense a. F..%.). .%.).
41.

?'i!' of t'e follo0ing follo0ing is a !ondition !ondition for a!!ruing a!!ruing a liability liability for t'e t'e !ost !ost of !ompens !ompensation ation for future absen!es a. T'e obligat obligation ion relates relates to to t'e rig'ts t'at vest vest or a!!umulate. a!!umulate. b. #aymen #aymentt of t'e !omp !ompens ensati ation on is proba probable ble..

















%urrent 5iabilities and %ontingen!ies 43.

13 - 11

T'e amou amount nt of t'e t'e liabi liabilit lity y for !omp !ompens ensate ated d absen!e absen!es s s'ould s'ould be base based d on 1. t'e t'e !urr !urren entt rate rates s of pay pay in effe effe!t !t 0'en 0'en empl employ oyee ees s earn earn t'e t'e rig' rig'tt to !ompensated absen!es. 2. t'e futu future re rate rates s of pay pay expe expe!t !ted ed to be paid paid 0'en 'en empl employ oyee ees s use use !ompensated time. 3. t'e present present value value of t'e t'e amount amount expe!ted expe!ted to to be paid in in future future periods. periods. a. b. !. d.

1. 2. 3. Eit' Eit'er er 1 or or 2 is a!! a!!ep epta tabl ble. e.

44.

?'i!' ?'i!' of t'e foll follo0i o0ing ng is t'e t'e prope properr 0ay 0ay to report report a gain gain !ontin !ontingen gen!y !y  a. )s an a!!r a!!rue ued d amo amoun unt. t. b. )s defe deferr rred ed reve revenu nue. e. !. )s an a!!o a!!oun untt re!e re!eiv ivab able le 0it' 0it' addi additi tion onal al dis! dis!lo losu sure re expl explai aini ning ng t'e t'e natu nature re of t'e t'e !ontingen!y. d. )s a dis dis!l !los osur ure e onl only y.

4$. 4$.

?'i! ?'i!' ' of t'e t'e fol follo0 lo0ing ing !on !onti ting ngen en!i !ies es nee need d not be be dis!losed in t'e finan!ial statements or t'e notes t'ereto a. #robab #robable le losses losses not not reasona reasonably bly estim estimabl able e b. Environment Environmental al liabiliti liabilities es t'at !annot !annot be reasonab reasonably ly estimate estimated d !. 9uaran 9uarantee tees s of indebt indebtedn edness ess of of ot'er ot'ers s d. )ll of t'es t'ese e must must be dis! dis!los losed. ed.

4&.

?'i!' ?'i!' of t'e foll follo0 o0ing ing sets sets of !onditi !onditions ons 0ould 0ould give give rise to t'e t'e a!!rual a!!rual of a !ontin !ontingen gen!y !y under !urrent generally a!!epted a!!ounting prin!iples a. )mount )mount of loss is reasona reasonably bly estimable estimable and event event o!!urs o!!urs infre8uent infre8uently ly.. b. )mount )mount of loss is reasona reasonably bly estimable estimable and o!!urre o!!urren!e n!e of event event is probable. probable. !. Event is unusual unusual in in nature nature and o!!urr o!!urren!e en!e of of event event is probabl probable. e. d. Event is unusual unusual in in nature nature and event event o!!urs infre8uentl infre8uently y.

4(.

7ar+ 7ar+ ?ard ?ard is a farmer farmer 0'o 0'o o0ns land land 0'i!' 0'i!' border borders s on t'e rig't rig't-of -of-0 -0ay ay of t'e "ort "ort'er 'ern n ailroad. Gn )ugust 1@ 2(@ due to t'e admitted negligen!e of t'e ailroad@ 'ay on t'e farm 0as set on fire and burned. ?ard 'ad 'ad a dispute 0it' t'e ailroad for several



















13 - 1/


4,.

) !ont !ontin inge gent nt liabi iabili lity ty a. definitely definitely exists exists as a liabili liability ty but its amount amount and due due date are indeterm indeterminable inable.. b. is a!!rue a!!rued d even even t'oug' t'oug' not reasona reasonably bly estimated. estimated. !. is not dis! dis!los losed ed in t'e finan finan!ia !iall stateme statements nts.. d. is t'e t'e resul resultt of a loss loss !ont !onting ingen! en!y y.

$.

To re!ord an asset asset retireme retirement nt obligatio obligation n <)G=@ <)G=@ t'e !ost asso!iated asso!iated 0it' t'e )G )G is a. expensed. ed. b. in!luded in!luded in t'e t'e !arrying !arrying amount amount of t'e t'e related related long-liv long-lived ed asset. asset. !. in!lud in!luded ed in in a separa separate te a!!oun a!!ount. t. d. none none of t'e t'es se.

$1.

) !ompan !ompany y is legally legally obligat obligated ed for t'e !osts !osts asso!i asso!iate ated d 0it' t'e retire retiremen mentt of a long-l long-live ived d asset a. only 0'en 0'en it 'ires 'ires anot'er anot'er party party to perform perform t'e t'e retirement retirement a!tiv a!tivities ities.. b. only if it perform performs s t'e a!tivitie a!tivities s 0it' its its o0n 0or+for! 0or+for!e e and e8uipment. e8uipment. !. 0'et' 0'et'er er it 'ires 'ires anot'er anot'er party to perform perform t'e retireme retirement nt a!tivit a!tivities ies or performs performs t'e a!tivities itself. d. 0'en 0'en it is prob probabl able e t'e asset asset 0ill 0ill be retir retired. ed.

$2. $2.

)ssu )ssume me t'at t'at a manu manufa fa!t !tur urin ing g !orp !orpor orat atio ion n 'as 'as <1= <1= good good 8ualit 8uality y !ont !ontro rol@ l@ <2= a oneone-ye year ar operating !y!le@ <3= a relatively stable pattern of annual sales@ and <4= a !ontinuing poli!y of guaranteeing ne0 produ!ts against defe!ts for t'ree years t'at 'as resulted in material but rat'er stable 0arranty repair and repla!ement repla!ement !osts. )ny liability for t'e 0arranty a. s'ould s'ould be repo reporte rted d as long-t long-term erm..


















13 - 13

#

$$.

7ayberr 7ayberry y %o. 'as a loss loss !onting !ontingen! en!y y to a!!rue. a!!rue. T'e T'e loss amoun amountt !an only only be reasona reasonably bly 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 amount of loss a!!rual s'ould be a. /ero. b. t'e t'e mini minimu mum m of t'e t'e rang range. e. !. t'e t'e mea mean n of of t'e t'e ran range ge.. d. t'e t'e maxi maximu mum m of t'e t'e rang range. e.



$&.

7arx 7arx %ompany %ompany be!ome be!omes s a0are a0are of a la0sui la0suitt after after t'e date date of t'e finan! finan!ial ial state statemen ments@ ts@ but but before t'ey are issued. ) loss and related liability s'ould be reported in t'e finan!ial statements if t'e amount !an be reasonably estimated@ an unfavorable out!ome is 'ig'ly probable@ and a. t'e 7arx 7arx %omp %ompany any admits admits guilt. guilt. b. t'e !ourt !ourt 0ill de!ide de!ide t'e !ase 0it'in 0it'in one year. year. !. t'e damage damages s appe appear ar to to be be mater material ial.. d. t'e !ause !ause for a!tion a!tion o!!urre o!!urred d during during t'e a!!ounti a!!ounting ng period period !overe !overed d by t'e finan!ia finan!iall statements.



$(.

se of of t'e a!!rua a!!ruall met'od met'od in in a!!oun a!!ountin ting g for prod produ!t u!t 0arr 0arranty anty !osts !osts a. is re8uir re8uired ed for fede federal ral in!om in!ome e tax purpos purposes. es. b. is fre8uently fre8uently :ustifi :ustified ed on t'e basis of expedien! expedien!y y 0'en 0arranty 0arranty !osts !osts are immaterial. immaterial. !. finds t'e t'e expense expense a!!ount a!!ount being being !'arged !'arged 0'en t'e seller seller performs performs in in !omplian!e !omplian!e 0it' 0it' t'e 0arranty. d. represents represents a!!epted a!!epted pra!ti! pra!ti!e e and s'ould be used used 0'enever 0'enever t'e 0arranty 0arranty is an integral integral and inseparable part of t'e sale.

















13 - 1

6&2. 6&2.


?'i! ?'i!' ' of t'e t'e fol follo lo0i 0ing ng is not a a permissible met'od of !al!ulating a bonus to an employee a. T'e bonus bonus is based based on in!ome in!ome before before dedu!tion dedu!tions s for t'e t'e bonus and and in!ome in!ome taxes. taxes. b. T'e bonus bonus is based on in!ome in!ome after after dedu!ti dedu!tion on of t'e bonus but before before dedu!t dedu!tion ion of in!ome taxes. !. T'e bonus bonus is based based on in!ome in!ome after after dedu!tion dedu!tions s for t'e t'e bonus and and in!ome in!ome taxes. taxes. d. )ll of t'ese t'ese are permis permissib sible. le.

%ult$ple C,o$ce An!e"— Conceptual Ite(

21. 22. 23. 24. 2$. 2&.

An#

d d a a b d

Ite(

2(. 2*. 2,. 3. 31. 32.

An#

! d ! d ! d

Ite(

33. 34. 3$. 3&. 3(. 3*.

An#

d d d a d b

Ite(

3,. 4. 41. 42. 43. 44.

An#

d d d ! d d

Ite(

4$. 4&. 4(. 4*. 4,. $.

An#

d b a ! d b

Ite(

$1. $2. $3. $4. $$. $&.

An#

Ite(

An#

! ! ! a b d

$(. $*. $,. &. &1. 6&2.

d ! a d d d

olutions to t'ose 7ultiple %'oi!e 8uestions for 0'i!' t'e ans0er is Jnone of t'ese.K 22. ) long-term long-term debt debt maturing maturing !urrently !urrently to to be paid paid 0it' 0it' !urrent !urrent assets assets is a !urrent !urrent liabili liability ty.. 32. )!!ounts )!!ounts #ayabl #ayable@ e@ ?ages ?ages #ayabl #ayable@ e@ et!.@ et!.@ 0ould 0ould be examples examples of of !urrent !urrent liabil liabilities ities.. 33. 33. T'e T'e !omp !ompan any y must bot' bot' inte intend nd to refi refina nan! n!e e t'e t'e obli obliga gati tion on on a long long-t -ter erm m basi basis s and and demonstrate t'e ability to !onsummate t'e refinan!ing to ex!lude a s'ort-term obligation from !urrent liabilities.


















13 - 19

&$.

Gn February February 1@ 2(@ 2(@ after after issuan!e issuan!e of of its its finan!ia finan!iall statemen statements ts for for 2&@ 2&@ Flynn Flynn %ompany %ompany entered into a finan!ing agreement 0it' 5ebo an+@ allo0ing Flynn %ompany to borro0 up to 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@$@ of notes payable 0it' First "ational an+ matu maturi ring ng 7ar! 7ar!' ' 1$@ 1$@ 2( 2(.. T'e T'e !omp !ompan any y inte intend nds s to borr borro0 o0 2@$ 2@$ @ @  unde underr t'e t'e agreement 0it' 5ebo and li8uidate t'e notes payable to First "ational. T'e agreement 0it' 5ebo also re8uires Flynn to maintain a 0or+ing !apital level of &@@ and pro'ibits t'e payment of dividends on !ommon sto!+ 0it'out prior approval by 5ebo an+. From t'e above information only@ t'e total s'ort-term debt of Flynn %ompany as of t'e De!ember 31@ 2( balan!e s'eet date is a. . b. 1@$ 1@$ @ @ .. !. 2@@. d. 4@ 4@ @ @ ..

&&. &&.

Gn De!em De!embe berr 31@ 31@ 2&@ 2&@ Frye Frye %o. 'as 2@ 2@@ @   of s'ort s'ort-t -ter erm m note notes s paya payabl ble e due due on February 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'e amount of t'e s'ort-term notes payable t'at s'ould be reported as !urrent liabilities on t'e De!ember 31@ 2& balan!e s'eet 0'i!' is issued on 7ar!' $@ 2( is a. . b. 3@.

















13 - 1:


&,.

Trent Trent@@ n!.@ n!.@ is a reta retailil store store oper operati ating ng in a stat state e 0it' 0it' a $L reta retailil sales sales tax. tax. T'e stat state e la0 provides t'at t'e retail sales tax !olle!ted during t'e mont' must be remitted to t'e state during t'e follo0ing follo0ing mont'. mont'. f t'e amount !olle!ted !olle!ted is remitted remitted to t'e state on or before t'e t0entiet' of t'e follo0ing mont'@ t'e retailer may +eep 3L of t'e sales tax !olle!ted. Gn )pril 1@ 2(@ Trent remitted *1@4* tax to t'e state tax division for 7ar!' 2( retail sales. ?'at 0as Trent s 7ar!' 2( retail sales sub:e!t to sales tax a. 1@ 1@&2,@ &2,@& &. . b. 1@ 1@$,&@ $,&@ . . !. 1@&*@. d. 1@ 1@&4$@ &4$@ . .

(.

Nolber Nolbertt %orporat %orporation ion 'as 2@$ 2@$@ @  of s'ort-te s'ort-term rm debt it expe! expe!ts ts to retire retire 0it' pro!ee pro!eeds ds from t'e sale sale of ($@ s'ares s'ares of !ommon sto!+. sto!+. f t'e sto!+ sto!+ is sold for 2 per s'are subse8uent to t'e balan!e s'eet date@ but before t'e balan!e s'eet is issued@ 0'at amount of s'ort-term debt !ould be ex!luded from !urrent liabilities a. 1@$@ b. 2@$@ !. 1@@ d. 

(1.

9rogan 9rogan %orpor %orporati ation on 'as 1@* 1@*@ @  of s'ort-te s'ort-term rm debt it expe! expe!ts ts to retire retire 0it' 0it' pro!eeds pro!eeds from t'e sale sale of &@ s'ares s'ares of !ommon sto!+. sto!+. f t'e sto!+ sto!+ is sold for 2 per s'are subse8uent to t'e balan!e s'eet date@ but before t'e balan!e s'eet is issued@ 0'at amount of s'ort-term debt !ould be ex!luded from !urrent liabilities a. 1@2@




















13 - 1<

(4.

) !ompan !ompany y gives gives ea!' of its its $ employee employees s
($.

) !ompan !ompany y gives gives ea!' of its its $ employee employees s
















13 - 1=


((.

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

(*. (*.

?'at ?'at is t'e t'e amou amount nt of t'e t'e a!!r a!!rue ued d liab liabililit ity y for for !omp !ompen ensa sate ted d abse absen! n!es es t'at t'at s'ou s'ould ld be reported at De!ember 31@ 2* a. ,4@,2. b. ,@(2. !. (,@*. d. ,$@(&.

(,.

) !ompany !ompany offers offers a !as' !as' rebate rebate of 1 on ea!' 4 pa!+age pa!+age of of lig't lig't bulbs bulbs sold sold during during 2(. 2(.


















13 - 1>

*3. *3.

) !om !ompa pany ny buys buys an oil oil rig rig for 2@ 2@ @ @   on Manu Manuary ary 1@ 1@ 2(. 2(. T'e T'e life life of t'e t'e rig rig is 1 years and t'e expe!ted !ost to dismantle t'e rig at t'e end of 1 years is 4@
*4. *4.

Duri During ng 2&@ 2&@ Oounge ungerr %o. %o. intr introd odu! u!ed ed a ne0 ne0 line line of ma!' ma!'in ines es t'at t'at !arry !arry a t're t'reee-ye year ar 0arranty against manufa!turerCs defe!ts. ased on industry experien!e@ 0arranty !osts are estimated estimated at 2L of sales in t'e year of sale@ 4L in t'e year after sale@ and &L in t'e se!ond year after sale. ales and a!tual 0arranty expenditures for t'e first t'ree-year period 0ere as follo0sA ales

)!tual ?arranty Expenditures Expend itures

















13 - /?

*(.


#ryor Frosted Frosted Fla+es Fla+es %ompany %ompany offers offers its its !ustomer !ustomers s a pottery pottery !ereal bo0l if t'ey t'ey send send in 4 boxtops 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 Frosted Fla+es and !ustomers redeemed 22@ boxtops re!eiving $$@ bo0ls. f t'e bo0ls !ost #ryor %ompany 2.$ ea!'@ 'o0 mu!' liability for outstanding premiums s'ould be re!orded at t'e end of 2( a. 2@ b. 3@ !. $@ 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 0ill be redeemed. Data for 2& and 2( are as follo0sA

















%urrent 5iabilities and %ontingen!ies ,2.

13 - /1

7oore 7oore %ompa %ompany ny estim estimate ates s its annual annual 0arr 0arranty anty expens expense e as 4L of of annual annual net net sales. sales. T'e follo0ing data relate to t'e !alendar year 2(A "et sales ?arranty liability a!!ount alan!e@ De!. 31@ 2( alan!e@ De De!. 31 31@ 2(

1@$@ 1@ $@

debit before ad:ustment !redit af after ad ad:ustment

?'i!' one of t'e follo0ing entries 0as made to re!ord t'e 2( estimated 0arranty expense a. ?arr ?arran anty ty Expe Expens nse e .... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...... ...... ...... ...... ...... ...... ..... &@ &@  etained Earnings


















13 - //

,$.


Norton Norton Food Food %ompany %ompany distr distribu ibutes tes to !onsu !onsumer mers s !oupons !oupons 0'i! 0'i!' ' may be present presented ed
















%urrent 5iabilities and %ontingen!ies 6,,. 6,,.

13 - /3

Farr Farr #rodu!ts #rodu!ts %orp. %orp. provid provides es an in!enti in!entive ve !ompens !ompensati ation on plan under under 0'i!' 0'i!' its presid president ent re!eives a bonus e8ual to 2L of t'e !orporations in!ome in ex!ess of 3@ before in!ome tax but after t'e bonus. f in!ome before tax and bonus is 1@2@ and t'e effe!tive tax rate is 3L@ t'e amount of t'e bonus 0ould be a 12& 

















13 - /

13. 13.


n!l n!lud uded ed in aud auder er %orp. %orp.s s liab liabililit ity y a!!o a!!oun untt bala balan! n!es es at De!e De!emb mber er 31@ 2& 2&@@ 0ere 0ere t'e t'e follo0ingA (L not note e paya payabl ble e issu issued ed G!t G!tob ober er 1@ 1@ 2& 2&@@ matu maturi ring ng ep epte temb mber er 3@ 3@ 2 2( ( *L note payable issued )pril 1@ 2&@ payable in six e8ual annual

2$ 2$@ @ 

















%urrent 5iabilities and %ontingen!ies 1&. 1&.

13 - /9

Dext Dexter er %o. %o. sell sells s ma:o ma:orr 'ous 'ouse' e'ol old d appl applia ian! n!e e serv servi! i!e e !ont !ontra ra!t !ts s for for !as' !as'.. T'e T'e serv servi! i!e e !ontra!ts are for a one-year@ t0o-year@ or t'ree-year period. %as' re!eipts from !ontra!ts are !redit !redited ed to unearn unearned ed servi servi!e !e !ontra !ontra!t !t revenu revenues. es. T'is a!!oun a!!ountt 'ad a balan! balan!e 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

















13 - /:


a. b. !. d.

. 1@. 3@. &&@.











































































































































Ch13 Current Liabilities and Contingencies

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