CHAPTER 13 CURRENT LIABILITIES, PROVISIONS, AND CONTINGENCIES CHAPTER LEARNING OBJECTIVES 1.
Describe the nature, type, and valuation of current liabilities.
2.
Explain the classification issues of short-term debt expected to be refinanced.
3.
Identify types of employee-related liabilities.
4.
Explain the accountin for different types of provisions.
!.
Identify the criteria used to account for and disclose continent liabilities and assets.
".
Indicate ho# to present and analy$e liability-related information.
13 ) (
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
TRUE)'ALSE*Con#e+t$a 1. % $ero-interest-bearin note payable that is issued at a discount #ill not result in any interest expense bein reconi$ed. 2. Dividends in arrears on cumulative preference shares shou ld be reported as a current liability. 3. &aa$ine subscriptions and airline tic'et sales both result in unea rned revenues. 4. %ll lon-term debt maturin #ithin the next year must be classif ied as a current liabil ity on the statement of financial position. !. % short-term obliation can be excluded from current liabilities if the company inte nds to refinance it on a lon-term basis. ". &any companies do not sere ate the sales tax collected and the amount of the sal e at the time of the sale. (. )hort-term debt obliations are class ified as current liabilities unless an areement to refinance is completed before the financial statements are issued. *. % company can exclude a short-term obliation from current liabilities if it intends to refinance the obliation and has an unconditional riht to defer settlement of the obliation for at least 12 months follo#in the due date. +. reference dividends in arrears are not a liabili ty until declared by the oard of Directors , but should be disclosed in the notes to the financial statements. 1. % company must accrue a liability for sic' pay that accumulates but does not vest. 11. /ompanies report the amount of socia l security taxes #ithheld from employees as #ell as the companies0 matchin portion as current liabilities until they are remitted. 12. %ccumulated rihts exi st #hen an emplo yer has an obli ation to ma'e payme nt to an employee even after terminatin his employment. 13. /ompanies should reconi$e the exp ense and related liab ility for compensated absences in the year earned by employees. 14. he expected profit from a sales type #arra nty that cove rs sever al years shoul d all be reconi$ed in the period the #arranty is sold. 1!. he cause for litiation must have occurred on or before the date of the financial statements to report a liability in the financial statements. 1". nder an assuranc e-type #arranty, companies chare #arr anty costs only to the period in #hich they comply #ith the #arranty. 1(. or purposes of reconi$in a provision, probable5 is defined as more li'e ly than not.
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 3
1*. % provision differs from other liabili ties in that there is reater uncerta inty about the timin and amount of settlement. 1+. /onstructive obliations, in #hich the company has creat ed a valid expect ation on the part of other parties that it #ill dischare certain responsibilities, are disclosed in the notes to the financial statements but not recorded. 2. rovisions are only recorded if it is possible that the company #ill have to settle an obliation at some point in the future. 21. %n onerou s contract is one in #hich the unavoidable costs of satisfyin the obli ations out#eih the economic benefits to be received. 22. Expected futur e operatin losse s can ener ally be accrued as part of a restructurin provision. 23. I7) allo#s for reduced disc losure of continent liabilities if the disclosure could increa se the company0s chance of losin a la#suit. 24. /ontinent liabilities are not reported in the financial statements but may be disclosed in the notes to the financial statements if the li'elihood of an unfavorable outcome is possible. 2!. /ontinent assets are not reported in the state ment of financial position. 2". I7) uses the term conti nent5 for assets and liabilities not reco ni$ed in the finan cial statements. 2(. /ontinent assets are disclosed #hen an inflo# of economic benefits is considered more li'ely than not to occur. 2*. repaid insurance shoul d be included in the numer ator #hen computin the acid-test 89uic': ratio. 2+. ayin a current liability #ith cash #ill al#ays reduce the current ratio. 3. /urrent liabilities are usual ly recorded and report ed in financial state ments at their full maturity value.
Tr$e 'ase Ans-ers* Con#e+t$a I te 1. 2. 3. 4. !.
Ans.
I te ". (. *. +. 1.
Ans.
I te 11. 12. 13. 14. 1!.
Ans.
I te 1". 1(. 1*. 1+. 2.
Ans.
Ite 21. 22. 23. 24. 2!.
Ans.
I te 2". 2(. 2*. 2+. 3.
Ans.
13 ) 0
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
/ULTIPLE CHOICE*Con#e+t$a 31.
6iabilities are a. any accounts havin credit balances after closin entries are made. b. deferred credits that are reconi$ed and measured in conformity #ith enerally accepted accountin principles. c. obliations to transfer o#nership shares to other entities in the future. d. present obliations arisin from past events resultin in an outflo# of resources.
32.
;hich of the follo#in is a current liability< a. % lon-term debt maturin currently, #hich is to be paid #it h cash in a sin'in fun d b. % lon-term debt maturin currently, #hich is to be ret ired #ith proceeds from a ne# debt issue c. % lon-term debt maturin currently, #hich is to be conve rted into ordinary shares d. =one of these ans#er choices are correct.
33.
%mon the short-term obliations of 6ance /ompany as of December 31, the statement of financial position date, are notes payable totalin >2!, #ith the &adison =ational an'. hese are +-day notes, rene#able for another +-day period. hese notes should be classified on the statement of financial position of 6ance /ompany as a. current liabilities. b. deferred chares. c. non-current liabilities. d. intermediate de bt.
34.
;hich of the follo#in may be a current liability< a. ;ithheld Income axes b. Deposits 7eceived from /ustomers c. nearned 7evenue d. %ll of these ans#ers are correct.
3!.
;hich of the follo#in items is a current liability< a. onds 8for #hich there is an ade9uate sin'in fund properly classified as a lon-term investment: due in three months. b. onds due in three years. c. onds 8for #hich there is an ade9uate appropriation of retained earnins: due in eleven months. d. onds to be refunded #he n due in eih t months, there bein no doub t about the mar'etability of the refundin issue.
3".
;hich of th e fo llo#in should not be included in the curre nt liabilities section of the statement of financial position< a. rade notes payable b. )hort-term $ero-interest-bearin notes payable c. nearned revenues d. %ll of these ans#er choices are included
/urrent 6iabilities, rovisions, and /ontinencies
13 )
3(.
;hich of the follo#in is a current liability< a. reference dividends in arrears b. % dividend payable in the form of additional shares c. % cash dividend payable to preference shareholders d. %ll of these ans#er choices are correct.
3*.
)hare dividends distributable should be classified on the a. income statement as an expense. b. statement of financial position as an asset. c. statement of financial position as a liability. d. statement of financial position as an item of e9uity.
3+.
?f the follo#in items, the only one #hich should not be classified as a current liability is a. current maturities of lon-term debt. b. sales taxes payable. c. short-term obliations expected to be refinanced. d. unearned re venues.
4.
;hich of the follo#in is a ch aracteristic of a current liability but not a non-current liability< a. navoidable obliation. b. resent obliation that entails settlement by probable futur e transfer or use of cash, oods, or services. c. )ettlement is expected #ithin the normal operatin cycle, or #ithin 12 months after the reportin date. d. ransaction or other event creatin the liability has already occurred.
41.
;hich of the follo#in is not considered a characteristic of a liability< a. resent obliation. b. %rises from past events. c. 7esults in an outflo# of resources. d. 6i9uidation is reasonably expected to re9uire use of existin resources classified as current assets.
42.
;hat is the relationship bet#een current liabilities and a company@s operatin cycle< a. 6i9uidation of current liabilities is reasonably expected #ithin the com pany@s operatin cycle 8or one year if more:. b. /urrent liabilities are the result of operatin transactions. c. /urrent liabilities can@t exceed the amount incurred in one operatin cycle. d. here is no relationship bet#een the t#o.
43.
;hat is the re lationship bet#een present value and the co ncept of a lia bility< a. resent values are used to measure certain liabilities. b. resent values are not used to measure liabilities. c. resent values are used to measure all liabilities. d. resent values are only used to measure non-current liabilities.
44.
;here is debt callable by the creditor reported on the debtor@s financial statements< a. =on-current liability. b. /urrent liability if the creditor intends to call the debt #ithin the year, other#ise a noncurrent liability. c. /urrent liability if it is probable that creditor #ill call the debt # ithin the year, other#ise a non-current liability. d. /urrent liability.
13 ) 2
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
4!.
;hich of the follo#in is not a condition necessary to exclude a short-term obliation from current liabilities< a. Intend to refinance the obliation on a lon-term basis. b. ?bliation must be due #ithin one year. c. nconditional riht to defer settlement of the liability for at least 12 months. d. )ubse9uently refinance the obliation on a lon-term basis.
4".
% company has not declared a dividend on its cumulative preference shares for the past three years. ;hat is the re9uired accountin treatment or disclosure in this situation< a. 7ecord a liability for cumulative amount of preference shares dividends not declared. b. Disclose the amount of the dividends in arrears. c. 7ecord a liability for the current year@s dividends only. d. =o disclosure or reconition is re9uired.
4(.
;hich of the follo#in situations may ive rise to unearned revenue< a. rovidin trade credit to customers. b. )ellin inventory. c. )ellin maa$ine subscriptions. d. rovidin manufacturer #arranties.
4*.
;hich of the follo#in statements is correct< a. % company may exclude a short-term obliation from current liabilities if it intends to refinance the obliation on a lon-term basis. b. % company may ex clude a short-term obliation from curr ent liabilities if it has an unconditional riht to defer settlement of the liability for at least 12 months. c. % company may exclude a short-term obliation from current liabilities if it is paid off after the statement of financial position date and subse9uently replaced by lon-term debt before the statement of financial position is issued. d. =one of these ans#er choices are correct.
4+.
;hich of the follo#in statements is fase? a. % company may exclude a short-term obliation from current liabilities if it intends to refinance the obliation on a lon-term basis and have an unconditional riht to defer settlement of the liability for at least 12 months. b. /ash dividends should be recorded as a liability #hen they are declared by the board of directors. c. nder the cash basis method, #arranty costs are chared to expense as they are paid. d. )ocial security taxes #ithheld from employees@ payroll chec's should never be recorded as a liability since the employer #ill eventually remit the amounts #ithheld to the appropriate taxin authority.
!.
;hich of the follo#in is not a correct statement about sales taxes< a. )ales taxes are an expense of the seller. b. &any companies record sales taxes in the sales account. c. If sales taxes are inc luded in the sale s account, the fi rst step to find the am ount of sales taxes is to divide sales by 1 plus the sales tax rate. d. %ll of these ans#er choices are true.
/urrent 6iabilities, rovisions, and /ontinencies
13 )
)
!1.
In accountin for compensated absences, the difference bet#een vested rihts and accumulated rihts is a. vested rihts are norm ally for a loner peri od of employment than are accumulated rihts. b. vested rihts are not continent upon an employee@s future service. c. vested rihts are a leal and bin din obliation on the company, #hereas accumulated rihts expire at the end of the accountin period in #hich they arose. d. vested rihts carry a stipulated dollar amount that is o#ed to the employeeA accumulated rihts do not represent monetary compensation.
!2.
%n employee@s net 8or ta'e-home: pay is determined by ross earnins minus amounts for income tax #ithholdins and the employee@s a. portion of I/% taxes. b. and employer@s portion of I/% taxes. c. portion of I/% taxes, and any mandatory deductions. d. portion of I/% taxes and any voluntary deductions.
!3.
% liability for comp ensated absences such as vacations, for #hic h it is expected that employees #ill be paid, should a. be accrued durin the peri od #hen the com pensated time is exp ected to be used by employees. b. be accrued durin the pe riod follo#in vestin. c. be accrued durin the period #hen earned. d. not be accrued unless a #ritten contractual obliation exists.
!4.
he amount of the liability for compensated absences should be based on 1. the current rates of pay in effect #he n employees earn the riht to compensated absences. 2. the expected rates of pay expected to be paid #hen employees use compensated time. 3. the present value of the amount expected to be paid in future periods. a. b. c. d.
1. 2. 3. Either 1 or 2 is acceptable.
!!.
;hat are compensated absences< a. npaid time off. b. % form of healthcare. c. ayroll deductions. d. aid time off.
!".
nder #hat conditions is an employer re9uired to accrue a liability for sic' pay< a. )ic' pay benefits can be reasonably estimated. b. )ic' pay benefits vest. c. )ic' pay benefits e9ual 1B of the pay. d. )ic' pay benefits accumulate.
!(.
;hich of the follo#in terms is associated #ith reconi$in a prov ision< a. ossible but not probable. b. 6i'ely. c. 7emote. d. robable.
13 ) 5
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
!*.
o record an environmental liability, the cost associated #ith the liability is a. expensed. b. included in the carryin amount of the related lon-lived asset. c. included in a separate account. d. =one of these ans#er choices are correct.
!+.
% company is lea lly obliated for the co sts associated #ith the reti rement of a lon- lived asset a. only #hen it hires another party to perform the retirement activities. b. only if it performs the activities #ith its o#n #or'force and e9uipment. c. #hether it hires another party to perfo rm the retir ement activities or performs the activities itself. d. only #hen the obliation arises at the outset of the asset0s use.
".
%ssume tha t a manufacturin corporation has 81: ood 9ual ity control, 82: a one-year operatin cycle, 83: a relatively stable pattern of annual sales, and 84: a continuin policy of uaranteein ne# products aainst defects for three years that has resulted in material but rather stable #arranty repair and replacement costs. %ny liability for the #arranty a. should be reported as non-current. b. should be reported as current. c. should be reported as part current and part non-current. d. need not be disclosed.
"1.
?rti$ /orporation, a manufacturer of household paints, is preparin annual financial statements at December 31, 21!. ecause of a recently proven health ha$ard in one of its paints, the overnment has clearly indicated its intention of havin ?rti$ recall all cans of this paint sold in the last six months. he manaement of ?rti$ estimates that this recall #ould cost >*,. ;hat accountin reconition, if any, should be accorded this situation< a. =o re conition b. =ote disclosure only c. ?peratin expense of >*, and liability of >*, d. %ppropriation of retai ned earnins of >* ,
"2.
Information available prior to the issuance of the fina ncial statements indicates that it is probable that, at the date of the financial statements, a company has a present obliation related to product #arranties. he amount of the expense involved can be reasonably estimated. ased on the above facts, the estimated #arranty expense should be a. accrued. b. disclosed but not accrued. c. ne"t4er accrued nor disclosed. d. classified as an appropriation of retained earnins.
"3.
Espinosa /o. ha s a provision to accr ue. he amount can onl y be reas onably estimated #ithin a rane of outcomes. =o sinle amount #ithin the rane is a better estimate than any other amount. he amount of the accrual should be a. b. c. d.
$ero. the mid point of the rane. the minimum of the rane. the maximum of the rane.
/urrent 6iabilities, rovisions, and /ontinencies )
13 ) 6
"4.
%ccountin for pro duct #arranty costs under an as surance-type #arranty a. is re9uired for income tax purposes. b. is fre9uently Custified on the basis of exp ediency #hen #arranty costs are immaterial. c. chares an expense account #hen the seller performs in compliance #ith the #arranty. d. represents accepted practice and should be used #henever the #arranty is an interal and inseparable part of the sale.
"!.
;hich of the follo#in best describes the accountin for assurance-type #arranty costs< a. Expensed #hen paid. b. Expensed #hen #arranty claims are certain. c. basedincurred. on estimate in year of sale. d. Expensed Expensed #hen
"".
In a service-type #arranty, #arranty revenue is a. reconi$ed in the year of sale. b. not reconi$ed. c. reconi$ed only in the last year of the #arranty period. d. reconi$ed e9ually over the #arranty period.
"(.
;hich of the follo#in is a characteristic of an assurance-type #arranty, but not a servicetype #arranty< a. ;arranty liability. b. ;arranty expense. c. nearned #arranty revenue. d. ;arranty rev enue.
"*.
%n electronics store is runn in a pro motion #here for every v ideo ame pur chased, the customer receiv es a coupon upon chec'out to purchase a second ame at a !B discount. he coupons expire in one year. he store normally reconi$ed a ross profit marin of 4B of the sellin price on video ames. o# #ould the store account for a purchase usin the discount coupon< a. he reduction in sales price attributed to the coupon is reconi$ed as premium expense. b. he difference bet#een the cost of the video ame and the cash received is reconi$ed as premium expense. c. remium expense is not reconi$ed. d. he difference bet#een the cost of the vid eo ame and the sel lin price prio r to the coupon is reconi$ed as premium expense.
"+.
;hat condition is necessary to reconi$e an environmental liability< a. /ompany has an existin leal obliation and can reasonably estimate the amount of the liability. b. /ompany can reasonably estimate the amount of the liability. c. /ompany has an existin leal obliation. d. ?bliation event has occurred.
(.
;hich of the follo#in is not to be considered considered #hen evaluatin #hether or not to record a liability for pendin litiation< a. ime period in #hich the underlyin cause of action occurred. b. he type of litiation involved. c. he probability of an unfavorable outcome. d. he ability to ma'e a reasonable estimate of the amount of the loss.
13 ) 18
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
(1.
;hich of the follo#in is the proper #ay to report a probable continent asset< a. %s an accrued amount. b. %s deferred revenue. c. %s an account receivable #ith additional disclosure explainin the nature of the continency. d. %s a disclosure only.
(2.
/ontinent assets need not be disclosed in the financial statements or the notes thereto if they are considered< a. irtually certain. b. robable. c. 6i'ely. d. ossible but not probable.
(3.
% continent liability a. al#ays exists as a liability but its amount and due date are indeterminable. b. is accrued even thouh not probable. c. is al#ays the result of a lo ss continency. d. is not reported as a liability if not probable.
(4.
;hich of the follo#in is the proper #ay to report a continent asset considered probable< a. %s an asset. b. %s deferred revenue. c. %s a disclosure only. d. =o disclosure or accrual re9uired.
(!.
;hich of the follo#in is th e proper #ay to report a continent asset, receipt of #hich is virtually certain< a. %s an asset. b. %s unearned revenue. c. %s a disclosure only. d. =o disclosure or accrual re9uired.
(".
rovisions are continent liabilities #hic h are accrued because the li'elihood of an unfavorable outcome is a. virtually certain. b. reater than !B. c. at least (!B. d. possible.
((.
Examples of continent assets include all of the follo#in e7#e+tF a. nreali$ed ain on the sale of investments. b. endin la#suit #ith a favorable outcome. c. ax refund disputed by the overnment but #ith a possible favorable outcome. d. romise of land to be dona ted by cit y as an enticement to mov e manufacturin facilities.
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 11
(*.
%ll of the follo#in are true reardin the presentation of current liabilities in the statement of financial position e7#e+t a. he non-current liabilities section follo#s the current liabilities section. b. /urrent liabilities may be listed in order of m aturity, in descendin order of manitude or in order of li9uidity preference. c. /urrent liabilities are enerally recorded at their full maturity values. d. /urrent liabilities should not be offset aainst the assets that #ill be used to li9uid ate them.
(+.
o# do you determine the acid-test ratio< a. he sum of cash and short-term investments divided by short-term debt. b. /urrent assets divided by current liabilities. c. /urrent assets divided by short-term debt. d. he sum of cash, short-term investments and net receivables divided by current liabilities.
*.
;hat does the current ratio inform you about a company< a. he extent of slo#-movin inventories. b. he efficient use of assets. c. he company@s li9uidity. d. he company@s profitability.
)
*1.
;hich of the follo#in is not acceptable treatment for the presentation of current liabilities< a. 6istin current liabilities in order of maturity b. 6istin current liabilities accordin to amount c. ?ffsettin current liabilities aainst assets that are to be appli ed to their li9uidation d. )ho#in current liabilities in order of li9uidation preference.
*2.
he ratio of current assets to current liabilities is called the a. current ratio. b. acid-test ratio. c. current asset turnover ratio. d. current liability turnover ratio.
*3.
he numerator of the acid-test ratio consists of a. total current assets. b. cash and short-term investments. c. cash and net receivables. d. cash, short-term investments, and net receivables.
*4.
Each of the follo#in are included in both the current ratio and the acid-test ratio e7#e+t a. cash. b. short-term inv estments. c. net receivables. d. inventory.
13 ) 1(
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
/$t"+e C4o"#e Ans-ers* Con#e+t$a Ite
31. 32. 33. 34. 3!. 3". 3(.
Ans.
d d a d c d c
Ite
3+. 4. 41. 42. 43. 44. 4!.
Ans.
c c d a a d d
Ite
4(. 4*. 4+. !. !1. !2. !3.
Ans.
c d d a b d c
Ite
!!. !". !(. !*. !+. ". "1.
Ans.
d b d b c c c
Ite
"3. "4. "!. "". "(. "*. "+.
Ans.
b d c d a b a
Ite
(1. (2. (3. (4. (!. (". ((.
Ans.
d d d c a b a
Ite
(+. *. *1. *2. *3. *4.
Ans.
d c c a d d
3*. d 4". b !4. d "2. a (. b (*. a )olutions to those &ultiple /hoice 9uestions for #hich the ans#er is none of these.5 32. % lon-term debt maturin currently to be paid #ith current assets is a current liability. 4*. he company must both intend to refinance the obliation on a lon- term basis and hav e an unconditional riht to defer settlement of the liability for at least 12 month.
/ULTIPLE CHOICE*Co+$tat"ona *!.
Glaus /orp. sined a three-month, $ero-interest-bearin >1!2,2! note on =ovem ber 1, 21! for the purchase of >1!, of inventory. he adCustin entry made at December 31, 21! #ill include a a. debit to =ote ayable for >(3!. b. debit to Interest Expense for >1,4(. c. credit to =ote ayable for >(3!. d. credit to Interest Expense for >1,4(.
*".
he effective interest on a 12-month, $ero-interest-bearin note payable of >3,, discounted at the ban' at 1B is a. 1.*(B. b. 1B. c. +.+B. d. 11.11B.
*(.
?n )ep tember 1, ydra purchased >+,! of inve ntory it ems on credit #ith the term s 1H1!, net 3, ? destination. reiht chares #ere >2. ayment for the purchase #as made on )eptember 1*. %ssumin ydra uses the perpetual inventory system and the net method of accountin for purchase discounts, #hat amount is recorded on )eptember 1 as accounts payable from this purchase< a. >+,4!. b. >+,"!. c. >+,(. d. >+,!.
**.
)odium Inc. borro#ed >1(!, on %pril 1. he note re9uires interest at 12B and principal to be paid 31< in one year. o# much interest is reconi$ed for the period from %pril 1 to December a. >. b. >21,. c. >!,2!. d. >1!,(!.
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 13
*+.
/ollier borro#ed >1(! , on ?cto ber 1 and is re9uired to pay >1* , on &arch 1. ;hat amount is the note payable recorded at on ?ctober 1 and ho# much interest is reconi$ed from ?ctober 1 to December 31< a. >1(!, and >. b. >1(!, and >3,. c. >1*, and >. d. >1(!, and >!,.
+.
?n )eptember 3, an /ompany sined a J>1!,, one-year $ero-interest-bearin note at irst )olvent an'. an0s borro#in rate on such obliations is 12B 8.*+2*" present value factor:. he )eptember 3 Cournal entry to record issuance of the note #ould includeF a. a debit to /ash for J>1!,. b. a debit to =otes 7eceivable for J>1!,. c. a credit to =otes ayable for J>133,+2+. d. a debit to Interest Expense for J>1",(1.
+1.
?n Kune 2, in /ompany purchased oods from /hee-/ho# /ompany for J>3,, terms 2H1, nH3. he invoice #as paid on Kune 2(. he company uses a perpetual inventory system and records purchases ross. he Kune 2( Cournal entry to record payment of the account #ould includeF a. a credit to /ash for J>3,. b. a credit to urchases Discounts for J>". c. a debit to %ccounts ayable for J>2+,4. d. a credit to Inventory for J>".
+2.
?n Dec ember 31, 21!, rye /o. has L4, , of sho rt-term notes payable due on ebruary 2*, 21". ?n December 23, 21!, rye arraned a line of credit #ith /ounty an' #hich allo# s rye to borro# up to L3,!, at one percent above the prime rate for three years. ?n ebruary 2, 21", rye borro#ed L2,!, from /ounty an' and used L!, additiona l cash to li9uidate L3,, of the short-term notes payable. he amount of the short-term notes payable that should be reported as current liabilities on the December 31, 21! statement of financial position #hich is issued on &arch 1!, 21" is a. >. b. >!,. c. >1,,. d. >4,,.
13 ) 10
+3.
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
alencia /orporation has the follo#in liabilities at December 31, 21!F *.+B note payable issued =ovember 1, 21!, maturin ?ctober 31, 21" (.2!B note payable issued %uust 1, 21!, payable in t#elve e9ual annual installments of >+, beinnin %uust 1, 21"
M1,1!, 1,*,
alencia0s December 31, 21! financial statements #ere issued on &arch 1+, 21". ?n Kanuary 23, 21", the entir e M1,1!, balance of the *.+B note #as refinanced by issuance of a lon-term obliation payable in a lump sum. In addition, on December 2+, 21!, alencia consummated a non-cancelable areement #ith the lender to refinance the (.2!B, M1,*, note on a lon-term basis, on readily determinable terms that have not yet been implemented. ?n the December 31, 21! statement of financial position, the amount of these notes payable that alencia should classify as short-term obliations is a. >. b. >1,*,. c. >1,1!,. d. >2,23,. +4.
urest o#es >1 million that is due o n ebruary 2*. he company borro#s >*, on ebruary 2! 8!-year note: and uses the proceeds to pay do#n the >1 million note and uses other cash to pay the balance. o# much of the >1 million note is classified as lonterm in the December 31 financial statements< a. >1,,. b. >. c. >*,. d. >2,.
+!.
ista ne#spapers sold 4, of annual subscriptions at >12! each on ) eptember 1. o# much a. >.unearned revenue #ill exist as of December 31< b. >333,333. c. >1"",""(. d. >!,.
+".
urchase 7etailer made cash sales durin the month of ?ctober of >13 2,". he sales are subCect to a "B sales tax that #as also collected. ;hich of the follo#in #ould be included in the summary Cournal entry to reflect the sale transactions< a. Debit /ash for >132,". b. /redit )ales ax ayable for >(,!". c. /redit )ales for >12!,+4. d. /redit )ales ax ayable for >(,+!".
/urrent 6iabilities, rovisions, and /ontinencies +(.
?n ebruary 1, 21!, after issuance of its financial statements for 214, ouse /ompany entered into a financin areement #ith 6ebo an', allo#in ouse /ompany to borro# up to >4,, at any time throuh 21(. %mounts borro#ed under the areement bear interest at 2B above the ban'@s prime interest rate and mature t#o years from the date of loan. ouse /ompany presently has >1,!, of notes payable #ith irst =ational an' maturin &arch 1!, 21!. he company intends to borro# >2,!, under the areement #ith 6ebo and li9uidate the notes payable to irst =ational. he areement #ith 6ebo also re9uires ouse to maintain a #or'in capital level of >",, and prohibits the payment of dividends on ordinary shares #ithout prior approval by 6ebo an'. rom the above information only, the total short-term debt of ouse /ompany as of the December 31, 214 statement of financial position date is a. b. c. d.
+*.
13 ) 1
>. >1,!,. >2,,. >4,,.
?n Dec ember 31, 214, Irey /o. has >2, , of sho rt-term notes payable due on ebruary 14, 21!. ?n Kanuary 1, 21!, Irey arraned a line of credit #ith /ounty an' #hich allo#s Irey to borro# up to >1,!, at one percent above the prime rate for three years. ?n ebruary 2, 21!, Irey borro#ed >1,2, from /ounty an' and used >!, additional cash to li9uidate >1,(, of the short-term notes payable. he amount of the short-term notes payable that should be reported as current liabilities on the December 31, 214 statement of financial position #hich is issued on &arch !, 21! is a. >. b. >3,. c. >!,. d. >*,. Use t4e foo-"n% "nforat"on for 9$est"ons 66 an! 188.
)tine /o. is a retail store operatin in a state #ith a "B retail sales tax. he retailer may 'eep 2B of the sales tax collected. )tine /o. records the sales tax in the )ales account. he amount recorded in the )ales account durin &ay #as >14*,4. ++.
1.
he amount of sales taxes 8to the nearest dollar: for &ay is a. >*,(2". b. >*,4. c. >*,+4. d. >+,43*. he amount of sales taxes payable 8to the ne arest dollar: to the sta te for th e month of &ay is a. >*,!!1. b. >*,232. c. >*,(2". d. >+,24+.
13 ) 12
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
11.
opat, Inc., is a ret ail store operatin in a sta te #ith a !B retail sales tax. he state la# provides that the retail sales tax collected durin the month must be remitted to the state durin the follo#in month. If the amount collected is remitted to the state on or before the t#entieth of the follo#in month, the retailer may 'eep 3B of the sales tax collect ed. ?n %pril 1, 21!, opat remitted >*1,4* tax to the state tax division for &arch 21! retail sales. ;hat #as opat @s &arch 21! retail sales subCect to sales tax< a. >1,"2+,". b. >1,!+",. c. >1,"*,. d. >1,"4!,.
12.
Ken'ins /orporation has >2 ,!, of short -term debt it ex pects to reti re #ith proceeds from the sale of (!, ordinary shares. If the shares are sold for >2 per share subse9uent to the statement of financial position date, but before the statement of financial position is issued, #hat amount of short-term debt could be excluded from current liabilities< a. >1,!, b. >2,!, c. >1,, d. >
13.
Ermler /orporation has >1 ,*, of shor t-term debt it expe cts to ret ire #ith proceeds from the sale of ", ordinary shares. If the shares are sold for >2 per share subse9uent to the statement of financial position date, but before the statement of financial position is issued, #hat amount of short-term debt could be excluded from current liabilities< a. >1,2, b. >1,*, c. >", d. >
14.
% company ives each of its ! employees 8assume they #ere all employed continuously throuh 214 and 21!: 12 days of vacation a year if they are employed at the end of the year. he vacation accumulates and may be ta'en startin Kanuary 1 of the next year. he employees #or' * hours per day. In 214, they made >14 per hour and in 21! they made >1" per hour. Durin 21!, they too' an averae of + days of vacation each. he company0s policy is to record the liability existin at the end of each year at the #ae rate for that year. ;hat amount of vacation liability #oul d be reflected on the 214 and 21! balance sheets, respectively< a. >"(,2A >+3," b. >(",*A >+", c. >"(,2A >+", d. >(",*A >+3,"
/urrent 6iabilities, rovisions, and /ontinencies 1!.
13 ) 1
% company ives each of it s ! emplo yees 8assume they #ere all emp loyed continuously throuh 214 and 21!: 12 days of vacation a year if they are employed at the end of the year. he vacation accumulates and may be ta'en startin Kanuary 1 of the next year. he employees #or' * hours per day. In 214, they made >1(.! per hour and in 21! they made >2 per hour. Durin 21!, they too' an averae of + days of vacation each. he company0s policy is to record the liability existin at the end of each year at the #ae rate for that year. ;hat amount of vacation liability #oul d be reflected on the 214 and 21! balance sheets, respectively< a. >*4,A >11(, b. >+",A >12, c. >*4,A >12, d. >+",A >11(, Use t4e foo-"n% "nforat"on for 9$est"ons 182 an! 18.
aras /ompany has 3! employees #ho #or' *-hour days and are paid hourly. ?n Kanuary 1, 214, the company bean a proram of rantin its employees 1 days of paid vacation each year. acation days earned in 214 may first be ta'en on Kanuary 1, 21!. Information relative to these employees is as follo#sF ear 214 21! 21"
ourly ;aes >2!.* 2(. 2*.!
acation Days Earned byEachEmployee 1 1 1
acation Days sed byEachEmployee * 1
aras has chosen to accrue the liability for compensated absences at the current rates of pay in effect #hen the compensated time is earned. 1".
;hat is the amount of expense relative to compensated absences that should be reported on aras0s income statement for 214< a. >. b. >"*,**. c. >(!,". d. >(2,24.
1(.
;hat is the amount of the accrued liability for compensated absences tha t should be reported at December 31, 21"< a. >+4,+2. b. >+,(2. c. >(+,*. d. >+!,(".
1*.
/al/ount pays a #ee'ly payroll of >*!, that includes federal taxes #ithheld of >12,(, I/% taxes #ithheld of >(,*+, and pension #ithholdins of >+,. ;hat is the effect of assets and liabilities from this transaction< a. %ssets decrease >*!, and liabilities do not chane. b. %ssets decrease >"4,41 and liabilities increase >2,!+. c. %ssets decrease >"4,41 and liabilities decrease >2,!+. d. %ssets decrease >!!,41 and liabilities increase >2+,!+.
13 ) 15
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
1+.
/al/ount provides its emp loyees t#o #ee's of paid vac ation per ye ar. %s of De cember 31, "! employees have earned t#o #ee's of vacation time to be ta'en the follo#in year. If the averae #ee'ly salary for these employees is >+!, #hat is the re9uired Cournal entry< a. Debit )alaries and ;aes Expense for >123,! and credit )alaries and ;aes ayable for >123,!. b. =o Cournal entry re9uired. c. Debit )alaries and ;aes aya ble for >123, and credit )ala ries and ;aes Expense for >123,. d. Debit )alaries and ;aes Expense for >"1,(! and credit )alaries and ;aes ayable for >"1,(!.
11.
7ecycle Exploration is involved #ith inn ovative approaches to findin enery res erves. 7ecycle recently built a facility to extract natural as at a cost of >1! million. o#ever, 7ecycle is also leally responsible to remove the facility at the end of its useful life of t#enty years. his cost is estimated to be >21 million 8the present value of #hich is >* million:. ;hat is the Cournal entry re9uired to record the environmental liability< a. =o Cournal entry re9uired. b. Debit =atural Gas acility for >21,, and credit Environmental 6iability for >21,, c. Debit =atural Gas acility for >",, and credit Environmental 6iability for >",,. d. Debit =atural Gas acility for >*,, and credit Environmental 6iability for >*,,.
111.
;arranty4 provides extended serv ice contracts on electronic e9uipment sold throuh maCor retailers. he standard contract is for three years. Durin the current year, ;arranty4 provided 21, such #arranty contracts at an averae price of >*1 each. 7elated to these contracts, the company spent >2, servicin the contracts durin the current year and expects to spend >1,!, more in the future. ;hat is the net profit that the company #ill reconi$e in the current year related to these contracts< a. >4!1,. b. >1,!1,. c. >1!,333. d. >3"(,.
112.
Electronics4 manufactures hih-end #hole home electronic systems. he company provides a one-year #arranty for all products sold. he company estimates that the #arranty cost is >2 per unit sold and reported a liability for estimated #arranty costs >".! million at the beinnin of this year. If durin the current year, the company sold !, units for a total of >243 million and paid #arranty claims of >(,!, on current and prior year sales, #hat amount of liability #ould the company report on its statement of financial position at the end of the current year< a. >2,!,. b. >3,!,. c. >+,,. d. >1,,.
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 16
113.
% company offers a cash rebate of >1 on each >4 pac'ae of liht bulbs sold durin 21. istorically, 1B of customers mail in the rebate form. Durin 21!, 4,, pac'aes of liht bulbs are sold, and 14, >1 rebates are mailed to customers. ;hat is the rebate expense and liability, respectively, sho#n on the 21! financial statements dated December 31< a. >4,A >4 , b. >4,A >2" , c. >2",A >2", d. >14,A >2" ,
114.
% company bu ys an oi l ri for >1 ,, on Kan uary 1, 21 !. he life of the ri is 1 years and the expected cost to dismantle the ri at the end of 1 years is >2, 8present value at 1B is >((,11:. 1B is an appropriate interest rate for this company. ;hat expense should be recorded for 21! as a result of these events< a. Depreciation expense of >12, b. Depreciation expense of >1, and interest expense of >(,(11 c. Depreciation expense of >1, and interest expense of >2, d. Depreciation expense of >1(,(11 and interest expense of >(,(11
11! .
Nieler /ompany self insures its property for fire and storm damae. If the company #ere to obtain insurance on the property, it #ould cost them >1,, per year. he company estimates that on averae it #ill incur losses of >*, per year. Durin 21!, >3!, #orth of losses #ere sustained. o# much total expense andHor loss should be reconi$ed by Nieler /ompany for 21!< a. >3!, in losses and no i nsurance expense b. >3!, in losses and >4!, in insurance expense c. > in losses and >*, in insurance expense d. > in losses and >1,, in insurance expense
11".
% company offers a cash re bate of >1 on each >4 pa c'ae of batteries sold durin 21!. istorically, 1B of customers mail in the rebate form. Durin 21!, ",, pac'aes of batteries are sold, and 21, >1 rebates are mailed to customers. ;hat is the rebate expense and liability, respectively, sho#n on the 21! financial statements dated December 31< a. >",A >" , b. >",A >3+ , c. >3+,A >3+, d. >21,A >3+ ,
11(.
% company bu ys an oi l ri for >2 ,, on Kan uary 1, 21 . he life of the ri is 1 years and the expected cost to dismantle the ri at the end of 1 years is >4, 8present value at 1B is >1!4,22:. 1B is an appropriate interest rate for this company. ;hat expense should be recorded for 21! as a result of these events< a. Depreciation expense of >24, b. Depreciation expense of >2, and interest expense of >1!,422 c. Depreciation expense of >2, and interest expense of >4, d. Depreciation expense of >21!,422 and interest expense of >1!,422
13 ) (8
11*.
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
Durin 214 , anpelt /o. int roduced a ne# line of machines tha t carry a three-year #arranty aainst manufacturer0s defects. ased on industry experience, #arranty costs are estimated at 2B of sales in the year of sale, 4B in the year after sale, and "B in the second year after sale. )ales and actual #arranty expenditures for the first three-year period #ere as follo#sF 214 21! 21"
)ales > ", 1,!, 2,1, >4,2,
%ctual ;arranty Expenditures > +, 4!, 13!, >1*+,
;hat a. >amount should anpelt report as a liability at December 31, 21"< b. >1!, c. >24, d. >31!, 11+.
almer rosted la'es /ompany offers its customers a pottery cereal bo#l if they send in 3 boxtops from almer rosted la'es boxes and >1.. he company estimates that "B of the boxtops #ill be redeemed. In 21!, the company sold "(!, boxes of rosted la'es and customers redeemed 33, boxtops receivin 11, bo#ls. If the bo#ls cost almer /ompany >2.! each, ho# much liability for outstandin premiums should be recorded at the end of 21!< a. >2!, b. >3(,! c. >"2,! d. >*(,!
12.
Durin 21! , )tabler /o. introduced a ne# line of machines tha t carry a three-year #arranty aainst manufacturer0s defects. oninindustry #arranty costs are estimated at 2B of sales in the year of ased sale, 4B the yearexperience, after sale, and "B in the second year after sale. )ales and actual #arranty expenditures for the first three-year period #ere as follo#sF 214 21! 21"
)ales > 4, 1,, 1,4, >2,*,
%ctual ;arranty Expenditures > ", 3, +, >12",
;hat amount should )tabler report as a liability at December 31, 21"< a. > b. >1, c. >13", d. >21,
/urrent 6iabilities, rovisions, and /ontinencies 121.
13 ) (1
6e&ay rosted la'es /ompany offers its customers a pottery cereal bo#l if they send in 4 boxtops from 6e&ay rosted la'es boxes and >1.. he company estimates that "B of the boxtops #ill be redeemed. In 21!, the company sold !, boxes of rosted la'es and customers redeemed 22, boxtops receivin !!, bo#ls. If the bo#ls cost 6e&ay /ompany >2.! each, ho# much liability for outstandin premiums should be recorded at the end of 21!< a. >2, b. >3, c. >!, d. >(, Use t4e foo-"n% "nforat"on for 9$est"ons 1(( :1(0.
&ott /o. includes one coupon in each ba of do food it sells. In return for eiht coupons, customers receive a leash. he leashes cost &ott >2. each. &ott estimates that 4 percent of the coupons #ill be redeemed. Data for 214 and 21! are as follo#sF asofdofoodsold 6eashespurchased /ouponsredeemed
214 !, 1*, 12,
122.
he premium expense for 214 is a. >2!,. b. >3,. c. >3!,. d. >!,.
123.
he premium liability at December 31, 214 is a. >(,!. b. >1,. c. >1(,!. d. >2,.
124.
he premium liability at December 31, 21! is a. >11,2!. b. >21,2!. c. >22,!. d. >42,!.
21! ", 22, 1!,
13 ) ((
12!.
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
=ance /ompany estimates its annual #arranty expense as 4B of ann ual net s ales. he follo#in data relate to the calendar year 21!F =etsales ;arranty liability account alance, Dec. 31, 21! alance, Dec. 31, 21!
>1,!, >1, !,
debit before adCustment credit after adCustment
;hich one of the follo#in entries #as made to record the 21! expense< a. ;arranty Expense .............................................................. 7etained Earnins 8prior-period adCustment: ............ ;arranty 6iability ...................................................... b. ;arranty Expense .............................................................. 7etained Earnins 8prior-period adCustment: ...................... ;arranty 6iability ...................................................... c. ;arranty Expense .............................................................. ;arranty 6iability ...................................................... d. ;arranty Expense .............................................................. ;arranty 6iability ...................................................... 12".
estimated #arranty ", 1, !, !, 1, ", 4, 4, ", ",
In 214, ayton /orporation bean sellin a ne# line of pro ducts that carry a t#o-year #arranty aainst defects. ased upon past experience #ith other products, the estimated #arranty costs related to dollar sales are as follo#sF irstyearof#arranty 2B )econdyearof#arranty !B )ales and actual #arranty expenditures for 214 and 21! are presented belo#F 214 21! )ales >3, %ctual#arrantyexpenditures 1, ;hat is the estimated #arranty liability at the end of 21!< a. >1+,. b. >2+,. c. >4+,. d. >*,.
>4, 2,
/urrent 6iabilities, rovisions, and /ontinencies 12(.
13 ) (3
uller ood /ompany distributes to con sumers coupons #hich may be pre sented 8on or before a stated expiration date: to rocers for discounts on certain products of uller. he rocers are reimbursed #hen they send the coupons to uller. In uller@s experience, !B of such coupons are redeemed, and enerally one month elapses bet#een the date a rocer receives a coupon from a consumer and the date uller receives it. Durin 21! uller issued t#o separate series of coupons as follo#sF Issued ?n 1H1H1! (H1H1!
otal alue >3(!, !4,
/onsumer Expiration Date "H3H1! 12H31H1!
%mount Disbursed as of 12H31H1! >1((, 22!,
he only Cournal entries to31, date recorded debits couponposition expense and credits of >!3",. he December 21! statement of to financial should includetoacash liability for unredeemed coupons of a. >. b. >4!,. c. >+3,. d. >2(,. 12*.
atcher /orporation sold 1,! dish#ashers for L1,1 each durin 21!. he dish#ashers are under #arranty for one year follo#in the sale. &aintenance on the dish#ashers durin the #arranty period averaes L+ each. %ctual #arranty costs incurred durin 21! for units sold that year #ere L2+",. he statemen t of financial position at year end #ill report a related liability ofF a. >2+",. b. >"4+,. c. >+4!,. d. >1,3,+.
12+.
=andina Inc. offers a cash re bate of 7s! on each 7s 2 pac'ae of bis cuits sold durin the last three months of 21!. istorically, 3B of the company0s customers mail in the rebate form. Durin the last three months of 21!, !,!, pac'aes of biscuits are sold, and 1,!, 7s! rebates are mailed to customers. ;hat is the rebate expense and liability, respectively, sho#n on the company0s 21! financial statements< a. 7s*2,!,A 7s3,, b. 7s*2,!,A 7s*2,!, c. 7s*2!,A 7s!2!, d. 7s>*,2!,A 7s3,2!,
13.
lit$ /orporation, a manufacturer of cleanin products, is preparin annual financial statements at December 31, 21!. ecause of a recently proven health ha$ard in one of its cleanin products, the .J. overnment has clearly indicated its intention of havin lit$ recall all cans of this paint sold in the last three months. he manaement of lit$ estimates that this recall #ould cost L!,*,. ;hat accountin reconition, if any, should be accorded this situation< a. =o reconition. b. =ote disclosure only. and liability of L!,*,. c. Expense of L!,*, d. Expense of L!,*,, and retained earnins restriction of O!,*,.
13 ) (0
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
131.
)eamus /orporation sold 1,! trash compactors for L!! each dur in 21!. he trash compactors are under #arranty for one year follo#in the sale. &aintenance on the trash compactors durin the #arranty period averaes L4! each. %ctual #arranty costs incurred durin 21! for units sold that year #ere L14*,. he statement of financial position at year end #ill report a related liability ofF a. >14*,. b. >324,!. c. >4(2,!. d. >!1!,4!.
132.
7endina Inc. offers a cash rebate of 7s! on each 7s2 pac'ae of biscuits sold durin the last three months of 21!. istorically, 3B of the company0s customers mail in the rebate form. Durin the last three months of 21!, (,(, pac'aes of biscuits are sold, and 1,4(, 7s! rebates are mailed to customers. ;hat is the rebate expense and liability, respectively, sho#n on the company0s 21! financial statements< a. 7s11!,!,A 7s42,,. b. 7s11!,!,A 7s11!,!,. c. 7s1,1!!,A 7s(3!,. d. 7s>11,!!,A 7s4,!!,.
133.
ender oot Inc. is involved in litiation reardin a faulty product sold in a prior year. he company has consulted #ith its attorney and determined that it is possible that they may lose the case. he attorneys estimated that there is a 4B chance of losin. If this is the case, their attorney estimated that the amount of any payment #ould be >!,. ;hat is the re9uired Cournal entry as a result of this litiation< a. Debit 6itiation Expense for >!, and credit 6itiation liability for >!,. b. =o Cournal entry is re9uired. c. Debit 6itiation Expense for >2, and credit 6itiation 6iability for >2,. d. Debit 6itiation Expense for >3, and credit 6itiation 6iability for >3,.
/urrent 6iabilities, rovisions, and /ontinencies 134.
13 ) (
;inter /o. is bein sued fo r illness caused to local residents as a resu lt of nelience on the company@s part in permittin the local residents to be exposed to hihly toxic chemicals from its plant. ;inter@s la#yer states that it is probable that ;inter #ill lose the suit and be found liable for a Cudment costin ;inter any#here from >1,2, to >",,. o#ever, the la#yer states that the most probable cost is >3,",. %s a result of the above facts, ;inter should accrue a. a loss conti nency of >1,2 , and discl ose an additi onal continency of up to >4,*,. b. a loss conti nency of >3," , and discl ose an additi onal continency of up to >2,4,. c. a loss continency of >3,", but not disclose an y additional continency. d. no loss continency but disclose a continency of >1,2, to >",,.
13!.
?n Kan uary 3, 21!, oyer /orp. o#ned a machine that had cos t >2,. he accumulated depreciation #as >12,, estimated salvae value #as >12,, and fair value #as >32,. ?n Kanuary 4, 21!, this machine #as irreparably damaed by ine /orp. and became #orthless. In ?ctober 21!, a court a#arded damaes of >32, aainst ine in favor of oyer. %t December 31, 21!, the final outcome of this case #as a#aitin appeal and #as, therefore, uncertain. o#ever, in the opinion of oyer0s attorney, it is probable ine0s appeal #ill be denied. %t December 31, 21!, #hat amount should oyer accrue for this continent asset< a. >32,. b. >2",. c. >2,. d. >.
13".
resented belo# is information available for &orton /ompany. /urrent %ssets Inventories repaid expenses %ccountsreceivable )hort-term investments /ash otal current assets
>11, 3, "1, (!, 4, >2*,
otal current liabilities are >12,. he acid-test ratio for &orton is a. 2.33 to 1. b. 2.* to 1. c. 1.1( to 1. d. .!4 to 1.
13 ) (2
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
/$t"+e C4o"#e Ans-ers* Co+$tat"ona Ite
Ans.
Ite
Ans.
Ite
Ans.
Ite
Ans.
Ite
Ans.
*!. *". *(. **. *+. +. +1.
Ans.
b d a d b c d
Ite
+3. +4. +!. +". +(. +*. ++.
c c b d b d b
11. 12. 13. 14. 1!. 1". 1(.
c d d c c d a
1+. 11. 111. 112. 113. 114. 11!.
a d d c b d a
11(. 11*. 11+. 12. 121. 122. 123.
d d b d b d d
12!. 12". 12(. 12*. 12+. 13. 131.
d a b b a c b
+2.
b
1.
b
1*.
d
11".
b
124.
d
132.
a
Ite
133. 134. 13!. 13".
Ans.
b b d c
/urrent 6iabilities, rovisions, and /ontinencies
13 ) (
/ULTIPLE CHOICE*CPA A!a+te! 13(.
;hich of the follo#in is ene rally associated #ith payables classified as accounts payable< eriodic ayment )ecured of Interest by /ollateral a. =o =o b. =o es c. es =o d. es es
13*.
?n Kanuary 1, 21!, eyer /o. leased a buil din to eins /orp. for a ten -year term at an annual rental of >*,. %t inception of the lease, eyer received >32, coverin the first t#o years@ rent of >1", and a security deposit of >1",. his deposit #ill not be returned to eins upon expiration of the lease but #ill be applied to payment of rent for the last t#o years of the lease. ;hat portion of the >32, should be sho#n as a current and non-current liability, respectively, in eyer@s December 31, 21! statement of financial position< /urrent 6iability =on-current 6iability a. > >32, b. >*, >1", c. >1", >1", d. >1", >*,
13+.
?n )ep tember 1, 214, erman /o. iss ued a note pay able to =at ional an' in the amount of >1,2,, bearin interest at 12B, and payabl e in three e9ual annual principal payments of >4,. ?n this date, the ban'@s prime rate #as 11B. he first payment for interest and principal #as made on )eptember 1, 21!. %t December 31, 21!, erman should record accrued interest payable of a. >4*,. b. >44,. c. >32,. d. >2+,334.
14.
Included in ernon /orp.@s liability account balances at Dec ember 31, 214, #ere the follo#inF (B note payable issued ?ctober 1, 214, maturin )eptember 3, 21! *B note payable issued %pril 1, 214, payable in six e9ual annual installmentsof>1,beinnin%pril1,21!
>2!, ",
ernon@s December 31, 214 financial statements #ere issued on &arch 31, 21!. ?n Kanuary 1!, 21!, the entire >", balance of the *B note #as refinanced by issuance of a lon-term obliation payable in a lump sum. In addition, on &arch 1, 21!, ernon consummated a noncancelable areement #ith the lender to refinance the (B, >2!, note on a lon-term basis, on readily determinable terms that have not yet been implemented. ?n the December 31, 214 statement of financial position, the amount of the notes payable that ernon should classify as short-term obliations is a. >3!,. b. >2!,. c. >1,. d. >.
13 ) (5
141.
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
Ede /ompany0s salaried employees are paid bi#ee'ly. ?ccasionally, advances made to employees are paid bac' by payroll deductions. Information relatin to salaries for the calendar year 21! is as follo#sF 12H31H14 12H31H1! Employeeadvances >12, >1*, %ccruedsalariespayable "!, < )alariesexpensedurintheyear "!, )alariespaiddurintheyear8ross: "2!, %t December 31, 21!, #hat amount should Ede report for accrued salaries payable< a. >+,. b. >*4,. c. >(2,. d. >2!,.
142.
elton /o. sells maCor household appliance service contracts for cash. he service contracts are for a one-year, t#o-year, or three-year period. /ash receipts from contracts are credited to unearned service contract revenues. his account had a balance of >4*, at December 31, 214 before year-end adCustment. )ervice contract costs are chared as incurred to the service contract expense account, #hich had a balance of >12, at December 31, 214. ?utstandin service contracts at December 31, 214 expire as follo#sF Durin21! Durin21" Durin21( >1, >1", >(, ;hat amount should be reported as unearned service contract revenues in elton@s December 31, 214 statement of financial position< a. >3",. b. >33,. c. >24,. d. >22,.
143.
ount radin )tamp /o. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. ount@s past experience indicates that only *B of the stamps sold to licensees #ill be redeemed. ount@s liability for stamp redemptions #as >(,!, at December 31, 214. %dditional information for 21! is as follo#sF )tamp service revenue from stamps sold to licensees /ost of redemptions
>!,, 3,4,
If all the stamps sold in 21! #ere presented for redemption in 21!, the redemption cost #ould be >2,!,. ;hat amount should ount report as a liability for stamp redemptions at December 31, 21! < a. >+,1,. b. >",",. c. >",1,. d. >4,1,.
/urrent 6iabilities, rovisions, and /ontinencies
13 ) (6
144.
=eer /o. has a probable los s that can onl y be reasonably estimated #ithin a ran e of outcomes. =o sinle amount #ithin the rane is a better estimate than any other amount. he loss accrual should be a. $ero. b. the maximum of the rane. c. the minimum of the rane. d. the mid point of the rane.
14!.
Durin 214, Eaton /o. in troduced a ne# produ ct carryin a t#o-y ear #arranty aainst defects. he estimated #arranty costs related to dollar sales are 2B #ithin 12 months follo#in sale and 4B in the second 12 months follo#in sale. )ales and actual #arranty expenditures for the years ended December 31, 214 and 21! are as follo#sF %ctual ;arranty )ales Expenditures 214 > *, >12, 21! 1,, 3, >1,*, >42, %t December 31, 21!, Eaton should report an estimated #arranty liability of a. >. b. >1,. c. >3,. d. >"",.
14".
In &arch 21!, an explosion occurred at Jir' /o.@s plant, causin damae to are a properties. y &ay 21!, no claims had yet been asserted aainst Jir'. o#ever, Jir'@s manaement and leal counsel concluded that it #as possible but not probable that Jir' #ould be held responsible for nelience, and that >4,, #ould be a reasonable estimate of the damaes. Jir'@s >!,, comprehensive public liability policy contains a >4, deductible clause. In Jir'@s December 31, 214 financial statements, for #hich the auditor@s field#or' #as completed in %pril 21!, ho# should this casualty be reported< a. %s a note disclosin a possible liability of >4,,. b. %s an accrued liability of >4,. c. %s a note disclosin a possible liability of >4,. d. =o note disclosure of accrual is re9uired for 214 because the event occurred in 21!.
/$t"+e C4o"#e Ans-ers* CPA A!a+te! Ite
Ans.
Ite
Ans.
Ite
Ans.
Ite
Ans.
Ite
Ans.
13(. 13*.
a b
13+. 14.
c a
141. 142.
a b
143. 144.
c d
14!. 14".
d c
13 ) 38
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
DERIVATIONS * Co+$tat"ona No. Ans-er
Der";at"on
*!.
b
>1!2,2! P >1!, Q >2,2!. >2,2! R 2H3 Q >1,4(.
*".
d
>3, S 8>3, P >3,: Q .1111 Q 11.11B.
*(.
a
8>+,! R .++: Q >+,4!.
**.
d
>1(!, R .12 R +H12 Q >1!,(!.
*+.
b
8>1*, P >1(!,: R 3H! Q >3,.
+.
c
of >1 for 1 period at 12B Q .*+2*"A .*+2*" R J>1!, Q J>133,+2+.
+1.
d
J>3, R .2Q J>".
+2.
b
O!, additional cash 8classified as current asset:.
+3.
c
M1,1!, 8refinancin not yet completed at 12-31-1!:.
+4.
c
>*,.
+!.
b
84, R >12!: R *H12 Q >333,333.
+".
d
>132," R ." Q >(,+!".
+(.
b
>1,!,.
+*.
d
>2,, P >1,2, Q >*,.
++.
b
)T.")Q>14*,4, ∴ ) Q >14,. >14*,4 P >14, Q >*,4.
1.
b
>*,4 R .+* Q >*,232.
11.
c
.!)R .+(Q >*1,4*,
12.
d
7efinancin not completed by financial reportin date.
13.
d
7efinancin not completed by financial reportin date.
14.
c
! R 12 R * R >14 Q >"(,2A ! R 1! R * R >1" Q >+",.
1!.
c
! R 12 R * R >1(.! Q >*4,A ! R 1! R * R >2 Q >12,.
∴
) Q >1,"*,.
/urrent 6iabilities, rovisions, and /ontinencies
DERIVATIONS* Co+$tat"ona <#ont.= No. Ans-er
Der";at"on
1".
d
>2!.* R * R 1 R 3! Q >(2,24.
1(.
a
8>2*.! R * R 1 R 3!: T 8>2(. R * R 2 R 3!: Q >+4,+2.
1*.
d
>12,( T >(,*+ T >+, Q >2+,!+A >*!, P >2+,!+ Q >!!,41.
1+.
a
"! R 2 #ee's R >+!H#ee' Q >123,!.
11.
d
resent value of the removal cost.
111.
d
U821, R >*1: ÷ 3 yrs.V P >2, Q >3"(,.
112.
c
>",!, T 8!, R >2: P >(,!, Q >+,,.
113.
b
4,, R .1 R >1 Q >4,A >4, P >14, Q >2",.
114.
d
8>1,, T >((,11: S 1 Q >1(,(11A >((,11 R .1 Q >(,(11.
11!.
a
11".
b
",, R .1 R >1 Q >",A >", P >21, Q >3+,.
11(.
d
8>2,, T >1!4,22: S 1 Q >21!,422A >1!4,22 R .1 Q >1!,422.
11*.
d
8>4,2, R .12: P >1*+, Q >31!,.
11+.
b
WU8"(!, R .": P 33,V S 3X R >1.! Q >3(,!.
12.
d
8>2,*, x .12: P >12", Q >21,.
121.
b
WU8!, R .": P 22,V S 4X R >1.! Q >3,.
122.
d
U8!, R .4: S *V R >2 Q >!,.
123.
d
U82, P 12,: S *V R >2 Q >2,.
124.
d
WU8", R .4: P 1!,V S *X R >2 Q >22,!. >22,! T >2, Q >42,!.
12!.
d
>1,!, R .4 Q >",.
13 ) 31
13 ) 3(
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
DERIVATIONS* Co+$tat"ona <#ont.= No. Ans-er
Der";at"on
12".
a
U8>3, T >4,: R .(V P >3, Q >1+,.
12(.
b
8>!4, R .!: P >22!, Q >4!,.
12*.
b
81,!: 8L+: Q L+4!, P L2+", Q >"4+,.
12+.
a
8!,!,: 83B: Q 1,"!, x 87s!: Q 7s*2,!,A 81,"!, Y 1,!,: x 87s!: Q 7s3,,.
13. 131.
c b
132.
a
8(,(,: 83B: Q 2,31, x 87s!: Q 7s11!,!,A 82,31, Y 1,4(,: x 87s!: Q 7s42,,.
133.
b
6i'elihood of loss is only possible, not probable.
134.
b
>3,", and >2,4,.
13!.
d
>, continent assets are not recorded unless virtually certain.
13".
c
>4, T >(!, T >"1, ZZZZZZZZZZZZZ Q 1.1( to 1. >12,
81,!: 8L4!: Q L4(2,! P L14*, Q >324,!.
DERIVATIONS* C PA A!a+te! No. Ans-er
Der";at"on
13(.
a
/onceptualZaccounts payable enerally are $ero-interest-bearin and unsecured.
13*.
b
>*, and >1",.
13+.
c
>*,R.12R
14.
a
>2!, T >1, Q >3!,.
141.
a
>"!, T >"!, P >"2!, Q >+,.
142.
b
>1, T >1", T >(, Q >33,.
143.
c
8>2,!, R .*: T >(,!, P >3,4, Q >",1,.
144.
d
/onceptual.
14!.
d
8>1,*, R .": P >42, Q >"",.
14".
c
/onceptual.
4 12
Q >32,.
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 33
E>ERCISES E7. 13)10Z=otes payable.
?n %uust 31, Ken's /o. partially refunded >1*, of its outstandin 1B note payable made one year ao to %rma )tate an' by payin >1*, plus >1*, interest, havin obtained the >1+*, by usin >!2,4 cash and sinin a ne# one-year >1", note discounted at +B by the ban'. Instr$#t"ons 81: &a'e the entry to record the partial refundin. %ssume Ken's /o. ma'es reversin entries
#hen appropriate. 82: repare the adCustin entry at December 31, assumin straiht-line amorti$ation of the discount.
So$t"on 13)10
81: =otes ayable U>1*, T 8>1", × .+:V........................... Interest Expense........................................................................ =otes ayable................................................................ /ash..............................................................................
1+4,4 1*,
82: Interest Expense U81H3 R 8>1", × .+:V................................ =otes ayable................................................................
4,*
1", !2,4
4,*
E7. 13)105Zayroll entries.
otal payroll of ;atson /o. #as >+2,, of #hich >1", represented amounts paid in excess of >1, to certain employees. Income taxes #ithheld #ere >22!,. he )ocial )ecurity tax is *B on an employee0s #aes up to >1,. Instr$#t"ons 8a: repare the Cournal entry for the #aes and salaries paid. 8b: repare the entry to record the emplo yer payroll taxes.
So$t"on 13)105
8a: )alaries and ;aes Expen se.................................................... ;ithholdin axesa yable............................................ )ocial) ecurityaxes ayable....................................... /ash.............................................................................. [ U8>+2, P >1",: R *BV
+2, 22!, ",*[ "34,2
13 ) 30
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
So$t"on 13)105 8cont.:
8b: ayroll ax Expense ................................................................ )ocial )ecurity axes ayable 8>(",R *B:......................................................
",* ",*
E7. 13)106Z/ompensated absences.
ates /o. bean operations on Kanuary 2, 214. It employs 1! people #ho #or' *-hour days. Each employee earns 1 paid vacation days annually. acation days may be ta'en after Kanuary 1 of the year follo#in the year in #hich they are earned. he averae hourly #ae rate #as >24. in 214 and >2!.! in 21!. he averae vacation days used by each employee in 21! #as +. ates /o. accrues the cost of compensated absences at rates of pay in effect #hen earned. Instr$#t"ons repare Cournal entries to record the transactions related to paid vacation days durin 214 and 21!.
So$t"on 13)106
21
)alaries and ; aes Expense.......................................... )alaries and ;aes ayable...............................
2*,* 81: 2*,*
81: 1! R * R >24. Q >2,**A >2,** R 1 Q >2*,*. 211
)alaries and ;aes Expense.......................................... )alaries and ;aes ayable........................................... /ash.....................................................................
1,"2 2!,+2 82:
)alaries and ;ae s Expense.......................................... )alaries and ;aes ayable...............................
3," 84:
82: >2,** R + Q >2!,+2. 83: 1! × * × >2!.! Q >3,"A >3," 84: >3," × 1 Q >3,".
×
2(,!4 83:
3,"
+ Q >2(,!4.
E7. 13)18Zremiums.
Irvin &usic )hop ives its customers coupons redeemable for a poster plus a Dixie /hic's /D. ?ne coupon is issued for each dollar of sales. ?n the surrender of 1 coupons and >!. cash, the poster and /D are iven to the customer. It is estimated that *B of the coupons #ill be presented for redemption. )ales for the first period #ere >(,, and the coupons redeemed totaled 34,. )ales for the second period #ere >*4,, and the coupons redeemed totaled *!,. Irvin &usic )hop bouht 2, posters at >2.Hposter and 2, /Ds at >".H/D. Instr$#t"ons repare the follo #in entries for the t#o periods, assumin all the coupons expected to be redeemed from the first period #ere redeemed by the end of the second period.
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 3
E7. 13)18 8cont.:
try
En
eriod 1
eriod 2
8a: o record coupons redeemed ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ 8b: o record estimated liability ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ
So$t"on 13)18
try
En
eriod 1
eriod 2
8a: remium 6iability "," remium Expense U834, S 1: R 8>*. P >!:V 1,2 1*,+ /ash834,S1:R>! 1(, 42,! remium Inventory 2(,2 "*, ZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZZ 8b: remium Expense remium 6iability [U8(, R .*: P 34,V S 1 R >3.
","[
1,2" ","
1,2"
E7. 13)11Zremiums.
Ed#ards /o. includes one coupon in each ba of do food it sells. In return for 4 coupons, customersthat receive a do of toythe thatcoupons the company >1.2214, each.1, Ed#ards@s experience indicates " percent #ill bepurchases redeemed.for Durin bas of do food #ere sold, 12, toys #ere purchased, and 4, coupons #ere redeemed. Durin 21!, 12, bas of do food #ere sold, 1", toys #ere purchased, and ", coupons #ere redeemed. Instr$#t"ons Determine the premium expense to be reported in the income statement and the premium liability on the statement of financial position for 214 and 21!.
So$t"on 13)11
remiumExpense remium6iability 81: 82: 83: 84:
214 >1*,81: ", 82:
21! >21,"83: +," 84:
1, R ." Q ",A ", S 4 Q 1!,A 1!, R >1.2 Q >1*,. 4, S 4 Q 1,A 1!, P 1, Q !,A !, R >1.2 Q >",. 12, R ." Q (2,A (2, S 4 Q 1*,A 1*, R >1.2 Q >21,". ", S 4 Q 1!,A !, T 1*, P 1!, Q *,A *, R >1.2 Q >+,".
13 ) 32
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
E7. 13)1(Zrovisions
he follo#in situations relate to ;ashburn /ompany. 1. ;ashburn provides a #arranty #ith all its products it sells. It estimates that it #ill sell 1,2, units of its product for the year ended December 31, 21!, and that its total revenue for the product #ill be >1,,. It also estimates that "B of the product #ill have no defects, 3B #ill have maCor defects, and 1B #ill have minor defects. he cost of a minor defect is estimated to be >! for each product repaired, and the cost for a maCor defect cost is >1!. he company also estimates that the minimum amount of #arranty expense #ill be >2,!, and the maximum #ill be >12,,. 2. ;ashburn is involved in a tax dis pute #ith the tax authorities. he most li'ely outcome of this dispute is that ;ashburn #ill lose and have to pay >!,. he minimum it #ill lose is >2!, and the maximum is >3,,. 3. ;ashburn has a policy of refundin purch ases to dissatisfied customers, even thouh it is under no obliation to do so. o#ever, it has created a valid expectation #ith its customers to continue this practice. hese refunds can rane from !B of sales to +B of sales, #ith any amount in bet#een a reasonable possibility. In 21!, ;ashburn has >!,, of sales subCect to possible refund. Instr$#t"ons repare the Cournal entry to record provisions, if any, for ;ashburn at December 31, 21!. So$t"on 13)1(
81:
;arranty Expense[................................................................ ",, ;arranty 6iability............................................................
",,
[Expected #arranty costs B =o defects &aCordefects &inordefects otal
"B 3B 1B 1B
nits (2, 3", 12, 1,2,
/ostper nit > 1! !
82:
ax Expense........................................................................... axes ayable................................................................
83:
)ales 7eturns[....................................................................... 3,!, %llo#ance f or ) ales 7 eturns..........................................
otal/osts >
!,4, ", ",,
!, !, 3,!,
[>!,, × 8!B T +B:H2 E7. 13)13Z/ontinent liabilities.
elo# are three independent situations. 1. In %uust, 21! a #or'e r #as inCured in the fact ory in an accid ent partially the resul t of his o#n nelience. he #or'e r has sued ;esley /o. for >*,. /ouns el believes it is possible but not probable that the outcome of the suit #ill be unfavorable and that the settlement #ould cost the company from >2!, to >!,.
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 3
E7. 13)13 8cont.:
2. % suit for breach of contract see'in damaes of >2,4, #as filed by an author aainst Greer /o. on ?ctober 4, 21!. Greer@s leal counsel believes that an unfavorable outcome is probable. % reasonable estimate of the a#ard to the plaintiff is bet#een >", and >1,*,. =o amount #ithin this rane is a better estimate of potential damaes than any other amount. 3. \uinn is involved in a pendin court case. \uinn0s la#yers believe it is probable that \uinn #ill be a#arded damaes of >1,,. Instr$#t"ons Discuss the proper accountin treatment, includin any re9uired disclosures, for each situation. Give the rationale for your ans#ers.
So$t"on 13)13
1.
;esley /o. sho uld disclose in the notes to the fina ncial statements the exi stence of a possible continent liabil ity related to the la#suit. he note should indicate the rane of the possible loss. he continent liability should not be accrued because the loss is possible, not probable.
2. he probable a#ard should be accr ued by a char e to an estimated loss and a credit to an estimated liability of >1,2,. Greer /o. should disclose the follo#in in the notes to the financial statementsF the amount of the suit, the nature of the continency, the reason for the accrual, and the rane of the possible loss. he accrual is made because it is probable that a liability has been incurred and a reasonable estimate can be made of the obli ation amount. he midp oint amount in the rane of possible losses is used #hen no amount is a better estimate than any other amount. 3.
\uinn should not record the continent asset unless it is virtually certain. sually, continent assets are neither accrued nor disclosed. he >1,, continent asset should be disclosed because its outcome is considered probable.
13 ) 35
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
PROBLE/S Pr. 13)10Z%ccounts and =otes ayable.
Described belo# are certain transactions of 6arson /ompany for 21!F 1.
?n &ay 1, the company purchased oods from ry /ompany for >!,, terms 2H1, nH3. urchases and accounts payable are recorded at net amounts. he invoice #as paid on &ay 1*.
2.
?n Kune 1, the comp any purchased e9uipment for >" , from 7a ney /ompany, payin >2, in cash and ivin a one-year, +B note for the balance.
3.
?n )eptember 3, the com pany borro#ed >1*,, by sin in a one-y ear $ero-interestbearin >12, note at irst )tate an'.
Instr$#t"ons 8a: repare the Courn al entries necessary to record the transactions above usin appropriate dates.
8b: repare the adCustin entries necessary at Decem ber 31, 21! in order to properly repor t interest expense related to the above transactions. %ssume straiht-line amorti$ation. 8c: Indicate the manne r in #hich the above transactions should be reflected in the /urren t 6iabilities section of 6arson /ompany@s December 31, 21! statement of financial position.
So$t"on 13)10
8a: &ay 1, 21! urchasesHInventory.................................................................. %ccounts ayable..........................................................
4+,
&ay 1*, 21! %ccounts ayable...................................................................... /ash..............................................................................
4+,
Kune 1, 21! E9uipment................................................................................. /ash.............................................................................. =otes ayable................................................................ )eptember 3, 21! /ash.......................................................................................... =otes ayable................................................................
4+,
4+, ", 2, 4,
1*, 1*,
8b: Interest Expense........................................................................ Interest ayable 8>4, R .+ R (H12:.........................
2,1
Interest Expense........................................................................
3,
=otes ayable 8>12, R 3H12:....................................
2,1
3,
/urrent 6iabilities, rovisions, and /ontinencies 8c: /urrent 6iabilities Interest payable =otepayableZ7aney/ompany =ote payableZirst )tate an'8>1*, T >3,:
13 ) 36
>2,1 4, 111, >1!3,1
Pr. 13) 1Z7efinancin of short-term debt.
%t the financial statement date of December 31, 214, the liabilities outstandin of ac'ard /orporation included the follo#inF 1. 2. 3. 4.
/ash dividends on ordinary shares, >",, payable on Kanuary 1!, 21!. =ote payable to Galena )tate an', >4(,, due Kanuary 2, 21!. )erial bonds, >1,,, of #hich >2!, mature durin 21!. =ote payable to hird =ational an', >3,, due Kanuary 2(, 21!.
he follo#in transactions occurred early in 21!F Kanuary 1!F he cash dividends on ordinary shares #ere paid. Kanuary 2F he note payable to Galena )tate an' #as paid. Kanuary 2!F he corpo ration enter ed into a financin aree ment #ith Galena )tate an', enablin it to borro# up to >!, at any time throuh the end of 21(. %mounts borro#ed under the areement #ould bear interest at 1B above the ban'@s prime rate and #ould mature 3 years from the date of the loan. he corporation immediately borro#ed >4, to replace the cash used in payin its Kanuary 2 note to the ban'. Kanuary 2"F 4, ordinary shares #ere issued for >3! ,. >3, of the proceeds #as used to li9uidate the note payable to hird =ational an'. ebruary 1F he financial statements for 214 #ere issued. Instr$#t"ons repare a partial statement of financial position for ac'ard /orporation, sho#in the manner in #hich the above liabilities should be presented at December 31, 214. he liabilities should be properly classified bet#een current and non-current, and appropriate note disclosure should be included.
So$t"on 13)1
=on-current liabilitiesF =ote payableZhird =ational an', refinanced in Kanuary,21!Z=ote1 )erialbondsnotmaturincurrently otalnon-currentliabilities /urrent liabilitiesF Dividendspayableoncommonstoc' =otespayableZGalena)tatean' /urrently maturin portion of serial bonds otal current liabilities otal liabilities
>3, (!, >1,!,
", 4(, 2!, (*, >1,*3,
13 ) 08
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
=ote 1F ?n Kanuary 2", 21!, the corporation issued 4, ordinary shares and received proceeds totalin >3!,, of #hich >3, #as used to li9uidate a note payable that matured on Kanuary 2(, 21!.
Pr. 13)12Zremiums.
aie /andy /ompany offers a coffee mu as a premium for every ten !-cent candy bar #rappers presented by customers toether #ith >1.. he purchase price of each mu to the company is + centsA in addition it costs " cents to mail each mu. he results of the premium plan for the years 214 and 21! are as follo#s 8assume all purchases and sales are for cash:F 214 21! /offeemuspurchased (2, *, /andy bars sold !,", ",(!, ;rappersredeemed 2,*, 4,2, 214 #rappers expected to be redeemed in 21! 2,, 21!#rappersexpectedtoberedeemedin21" 2,(, Instr$#t"ons 8a: repare the ener al Cournal entries that sho uld be made in 21 4 and 21! rela ted to the above plan by aie /andy.
8b: Indicate the account names, amounts, and classifications of the items related to the premium plan that #ould appear on the aie /andy /ompany statement of financial position and income statement at the end of 214 and 21!. So$t"on 13)12
8a:
214 remium Inventory.......................................................................... /ash.................................................................................... 8(2, R >.+ Q >"4*,:
"4*, "4*,
/ash................................................................................................ 2,*, )ales 7evenue.................................................................... 8!,", R >.! Q >2,*,: /ash................................................................................................ remium Expense........................................................................... remium Inventory............................................................... U2,*, S 1 Q 2*, R 8>1. P >.": Q >112, 2*, R >.+ Q >2!2,V
112, 14,
remium Expense........................................................................... remium 6iability................................................................. 82,, S 1 Q 2, R >.! Q >1,:
1,
21! remium Inventory.......................................................................... /ash ................................................................................... 8*, R >.+ Q >(2,:
2,*,
2!2,
1,
(2, (2,
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 01
13 ) 0(
Test Bank for Intere!"ate A##o$nt"n%& I'RS E!"t"on, (e
/ash................................................................................................ 3,3(!, )ales 7evenue.................................................................... 8",(!, R >.! Q >3,3(!,: /ash................................................................................................ remium 6iability ............................................................................ remium Expense........................................................................... remium Inventory............................................................... U4,2, S 1 Q 42, R 8>1. P >.": Q >1"*, 42, R >.+ Q >3(*,V
1"*, 1, 11,
remium Expense........................................................................... remium 6iability................................................................. 82,(, S 1 Q 2(, R >.! Q >13!,:
13!,
3,3(!,
3(*,
13!,
8b: )tatement of inancial osition =ame remiumInventory remium6iability
/lass /urrent%sset /urrent6iability
214 >3+", 1,
21! >(3*, 13!,
/lass ?peratinExpense
214 >24,
21! >24!,
Income )tatement =ame remiumExpense
Pr. 13)1Z;arranties.
&iley E9uipment /ompany sells computer s for >1,! each and also ives each custome r a 2year #arranty that re9uires the company to perform periodic services and to replace defective parts. Durin 214, the company sold ( computers. ased on past experience, the company has estimated the total 2-year #arranty costs as >3 for parts and >" for labor. 8%ssume sales all occur at December 31, 214.: In 21!, &iley incurred actual #arranty costs relative to 214 computer sales of >1, for parts and >1*, for labor. Instr$#t"ons 8a: nder an assurance-type warranty, prepare the entries to reflect the above transactions 8accrual method: for 214 and 21!.
8b: he transactions of part 8a: create #hat balance under current liabilities in the 214 statement of financial position<
/urrent 6iabilities, rovisions, and /ontinencies
13 ) 03
So$t"on 13)1
8a:
214 %ccounts 7eceivable....................................................................... 1,!, )ales 7evenue.................................................................... ;arranty Expense........................................................................... ;arranty 6iability................................................................. 21! ;arranty 6iability............................................................................. Inventory.............................................................................. %ccrued ayroll....................................................................
8b:
214
1,!,
"3, "3,
2*,
/urrent 6iabilitiesZ;arranty 6iability >31,!. 8he remainder of the >"3, liability is a non-current liability.:
1, 1*,
