Ch13 Current Liabilities and Contingencies

CHAPTER 13
CURRENT LIABILITIES AND CONTINGENCIES

TRUE-FALSEConceptual
An!e" No# Dec"$pt$on
F 1. Zero-interest-bearing note payable.
F 2. Dividends in arrears.
T 3. Examples of unearned revenues.
T 4. eporting dis!ount on "otes #ayable.
F $. %urrently maturing long-term debt.
F &. Ex!luding s'ort-term debt refinan!ed.
T (. )!!ounting for sales tax !olle!ted.
F *. )!!ounting for si!+ pay.
T ,. -o!ial se!urity taxes as liabilities.
F 1.. Definition of a!!umulation rig'ts.
T 11. e!ogni/ing !ompensated absen!es expense.
F 12. )!!ruing estimated loss !ontingen!y.
T 13. Dis!losing gain !ontingen!ies.
F 14. -ales-type 0arranty profit.
T 1$. Fair value of asset retirement obligation.
T 1&. eporting a litigation liability.
F 1(. Expense 0arranty approa!'.
F 1*. )!id-test ratio !omponents.
F 1,. )ffe!t on !urrent ratio.
T 2.. eporting !urrent liabilities.
%ULTIPLE CHOICEConceptual
d 21. Definition of a liability.
d 22. "ature of !urrent liabilities.
a 23. e!ording of a!!ounts payable.
a 24. %lassifi!ation of notes payable.
b 2$. %lassifi!ation of dis!ounts on notes payable.
d 2&. 1dentify !urrent liability.
! 2(. 2onds reported as !urrent liability.
d 2*. 1dentify item 0'i!' is not a !urrent liability.
! 2,. Dividends reported as !urrent liability.
d 3.. %lassifi!ation of sto!+ dividends distributable.
! 31. 1dentify item 0'i!' is not a !urrent liability.
d 32. 1dentify !urrent liability.
d 33. -'ort-term obligations expe!ted to be refinan!ed.
d 34. )bility to !onsummate refinan!ing of s'ort-term obligations.
d 3$. Determine 0'at is a liability.
a 3&. %lassifi!ation of sales taxes.
Tet Ban& 'o" Inte"(e)$ate Account$n*+ T!el't, E)$t$on
%ULTIPLE CHOICEConceptual -cont#.
d
-
3(. Dis!losure for s'ort-term debt refinan!ed.
b
-
3*. 3ested rig'ts vs. a!!umulated rig'ts.
d
#
3,. Dedu!tions in !omputing net pay.
d 4.. Employer4s payroll tax expense.
d 41. )!!rual of a liability for !ompensated absen!es.
! 42. )!!rual of a liability for !ompensated absen!es.
d 43. )!!rual of a liability for !ompensated absen!es.
d 44. Dis!losure of a gain !ontingen!y.
d 4$. Dis!losure of !ontingen!ies.
b 4&. )!!rual of loss !ontingen!y.
a 4(. 5itigation and loss !ontingen!ies.
! 4*. )!!rual of a !ontingent liability.
d 4,. -our!e of a !ontingent liability.
b $.. )sset retirement obligation.
! $1. )sset retirement obligation.
! $2. %lassifi!ation of 0arranty liability.
! $3. 5iability a!!rual due to governmental a!tion.
a $4. )!!rual of produ!t 0arranties.
b
#
$$. Determining loss amount to report.
d
-
$&. eporting la0suit loss and liability.
d
-
$(. )!!rual met'od for 0arranty !osts.
!
-
$*. #resentation of !urrent liabilities.
a
#
$,. %urrent ratio formula.
d &.. Dis!losure of a!!rued liabilities.
d &1. )!id-test ratio elements.
d 6&2. 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 CHOICECo(putat$onal
b &3. )d:usting entry involving dis!ount on s'ort-term note payable.
d &4. %al!ulate effe!tive interest on dis!ounted note.
b &$. Determine amount of s'ort-term debt to be reported.
d &&. Determine amount of s'ort-term debt to be reported.
b &(. %al!ulate sales taxes for t'e mont'.
b &*. %al!ulate amount of sales taxes payable.
! &,. Determine amount of sales sub:e!t to sales tax.
a (.. -'ort-term debt to be ex!luded.
a (1. -'ort-term debt to be ex!luded.
d (2. Federal;state unemployment taxes.
d (3. Federal;state unemployment taxes.
! (4. 3a!ation liability a!!rual.
! ($. 3a!ation liability a!!rual.
! (&. %al!ulate payroll tax expense.
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%urrent 5iabilities and %ontingen!ies
%ULTIPLE CHOICECo(putat$onal -cont#.
d ((. %al!ulation of va!ation expense to be re!ogni/ed.
a (*. %al!ulation of a!!rued liability to be re!ogni/ed for !ompensated balan!es.
b (,. %al!ulate rebate expense and liability.
d *.. )sset retirement obligation.
a *1. %al!ulate insuran!e expense and loss.
b *2. %al!ulate rebate expense and liability.
d *3. )sset retirement obligation.
d *4. %al!ulate 0arranty liability.
b *$. %al!ulate liability for premiums.
d *&. %al!ulate 0arranty liability.
b *(. %al!ulate liability for premiums.
d **. Determine premiums expense for t'e year.
d *,. %al!ulate estimated liability for premiums.
d ,.. %al!ulate estimated liability for premiums.
b ,1. Determine amount to a!!rue as a loss !ontingen!y.
d ,2. )!!rue 0arranty expense for t'e year.
a ,3. %al!ulate 0arranty liability.
d ,4. Determine amount to a!!rue as a gain !ontingen!y.
b ,$. %al!ulate liability for unredeemed !oupons.
! ,&. %al!ulate t'e 8ui!+ <a!id-test= ratio.
! 6,(. %al!ulate amount of bonus to be re!ogni/ed.
! 6,*. %al!ulate amount of bonus to be re!ogni/ed.
b 6,,. %al!ulate amount of bonus to be re!ogni/ed.
%ULTIPLE CHOICECPA A)apte)
a 1... >no0ledge of a!!ounts payable.
b 1.1. Determine !urrent and long-term portions of debt.
! 1.2. Determine a!!rued interest payable.
d 1.3. Determine amount of s'ort-term debt to be reported.
a 1.4. %al!ulate a!!rued salaries payable.
d 1.$. )!!rual of payroll taxes.
b 1.&. %al!ulate unearned servi!e !ontra!t revenue.
! 1.(. Determine liability from unredeemed trading stamps.
d 1.*. Determine range of loss a!!rual.
d 1.,. %al!ulate t'e estimated 0arranty liability.
! 11.. Dis!losure of a !asualty !laim.
E0ERCISES
Ite( Dec"$pt$on
E13-111 "otes payable.
E13-112 #ayroll entries.
E13-113 %ompensated absen!es.
E13-114 %ontingent liabilities.
E13-11$ #remiums.
E13-11& #remiums.
6E13-11( 2onus !al!ulation.
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PROBLE%S
Ite( Dec"$pt$on
#13-11* )!!ounts and notes payable.
#13-11, efinan!ing of s'ort-term debt.
#13-12. #remiums.
#13-121 ?arranties.
CHAPTER LEARNING OB1ECTI2ES
1. Des!ribe t'e nature@ type@ and valuation of !urrent liabilities.
2. Explain t'e !lassifi!ation issues of s'ort-term debt expe!ted to be refinan!ed.
3. 1dentify types of employee-related liabilities.
4. 1dentify t'e !riteria used to a!!ount for and dis!lose gain and loss !ontingen!ies.
$. Explain t'e a!!ounting for different types of loss !ontingen!ies.
&. 1ndi!ate 'o0 to present and analy/e liabilities and !ontingen!ies.
6(. %ompute employee bonuses under differing arrangements.
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SU%%AR4 OF LEARNING OB1ECTI2ES B4 5UESTIONS
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Lea"n$n* O67ect$8e 1
1. TF 21. 7% 2$. 7% 2,. 7% &3. 7% 1.2. 7%
2. TF 22. 7% 2&. 7% 3.. 7% &4. 7% 111. E
3. TF 23. 7% 2(. 7% 31. 7% 1... 7% 11*. #
4. TF 24. 7% 2*. 7% 32. 7% 1.1. 7%
Lea"n$n* O67ect$8e /
$. TF 33. 7% 3&. 7% &&. 7% &,. 7% 1.3. 7%
&. TF 34. 7%
-
3(. 7% &(. 7% (.. 7% 11,. #
(. TF 3$. 7% &$. 7% &*. 7% (1. 7%
*. TF 3$. 7% 41. 7% (3. 7% ((. 7% 112. E
,. TF
-
3*. 7% 42. 7% (4. 7% (*. 7% 113. E
1.. TF
#
3,. 7% 43. 7% ($. 7% 1.4. 7%
11. TF 4.. 7% (2. 7% (&. 7% 1.$. 7%
12. TF 3$. 7% 4$. 7% 4(. 7% 4,. 7%
13. TF 44. 7% 4&. 7% 4*. 7% 114. E
14. TF $2. 7% (,. 7% *$. 7% ,1. 7% 1.(. 7% 12.. #
1$. TF $3. 7% *.. 7% *&. 7% ,2. 7% 1.*. 7% 121. #
1&. TF $4. 7% *1. 7% *(. 7% ,3. 7% 1.,. 7%
1(. TF
#
$$. 7% *2. 7% **. 7% ,4. 7% 11.. 7%
$.. 7%
-
$&. 7% *3. 7% *,. 7% ,$. 7% 11$. E
$1. 7%
-
$(. 7% *4. 7% ,.. 7% 1.&. 7% 11&. E
Lea"n$n* O67ect$8e :
1*. TF 2.. TF
#
$,. 7% &1. 7% 11*. # 12.. #
1,. TF
-
$*. 7% &.. 7% ,&. 7% 11,. #
Lea"n$n* O67ect$8e ;<
&2. 7% ,(. 7% ,*. 7% ,,. 7% 11(. E
"oteA TF B True-False E B Exer!ise
7% B 7ultiple %'oi!e # B #roblem
13 - 9
TRUE-FALSEConceptual
1. ) /ero-interest-bearing note payable t'at is issued at a dis!ount 0ill not result in any interest
expense being re!ogni/ed.
2. Dividends in arrears on !umulative preferred sto!+ s'ould be re!orded as a !urrent liability.
3. 7aga/ine subs!riptions and airline ti!+et sales bot' result in unearned revenues.
4. Dis!ount on "otes #ayable is a !ontra a!!ount to "otes #ayable on t'e balan!e s'eet.
$. )ll long-term debt maturing 0it'in t'e next year must be !lassified as a !urrent liability on
t'e balan!e s'eet.
&. ) s'ort-term obligation !an be ex!luded from !urrent liabilities if t'e !ompany intends to
refinan!e it on a long-term basis.
(. 7any !ompanies do not segregate t'e sales tax !olle!ted and t'e amount of t'e sale at t'e
time of t'e sale.
*. ) !ompany must a!!rue a liability for si!+ pay t'at a!!umulates but does not vest.
,. %ompanies report t'e amount of so!ial se!urity taxes 0it''eld from employees as 0ell as
t'e !ompaniesC mat!'ing portion as !urrent liabilities until t'ey are remitted.
1.. )!!umulated rig'ts exist 0'en an employer 'as an obligation to ma+e payment to an
employee even after terminating 'is employment.
11. %ompanies s'ould re!ogni/e t'e expense and related liability for !ompensated absen!es in
t'e year earned by employees.
12. %ompanies s'ould a!!rue an estimated loss from a loss !ontingen!y if information available
prior to t'e issuan!e of finan!ial statements indi!ates t'at it is probable t'at a liability 'as
been in!urred.
13. ) !ompany dis!loses gain !ontingen!ies in t'e notes only 0'en a 'ig' probability exists for
reali/ing t'em.
14. T'e expe!ted profit from a sales type 0arranty t'at !overs several years s'ould all be
re!ogni/ed in t'e period t'e 0arranty is sold.
1$. T'e fair value of an asset retirement obligation is re!orded as bot' an in!rease to t'e
related asset and a liability.
1&. T'e !ause for litigation must 'ave o!!urred on or before t'e date of t'e finan!ial statements
to report a liability in t'e finan!ial statements.
1(. Dnder t'e expense 0arranty approa!'@ !ompanies !'arge 0arranty !osts only to t'e period
in 0'i!' t'ey !omply 0it' t'e 0arranty.
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1*. #repaid insuran!e s'ould be in!luded in t'e numerator 0'en !omputing t'e a!id-test
<8ui!+= ratio.
1,. #aying a !urrent liability 0it' !as' 0ill al0ays redu!e t'e !urrent ratio.
2.. %urrent liabilities are usually re!orded and reported in finan!ial statements at t'eir full
maturity value.
T"ue Fale An!e"Conceptual
Ite( An# Ite( An# Ite( An# Ite( An#
1. F &. F 11. T 1&. T
2. F (. T 12. F 1(. F
3. T *. F 13. T 1*. F
4. T ,. T 14. F 1,. F
$. F 1.. F 1$. T 2.. T
%ULTIPLE CHOICEConceptual
21. 5iabilities are
a. any a!!ounts 'aving !redit balan!es after !losing entries are made.
b. deferred !redits t'at are re!ogni/ed and measured in !onformity 0it' generally
a!!epted a!!ounting prin!iples.
!. obligations to transfer o0ners'ip s'ares to ot'er entities in t'e future.
d. obligations arising from past transa!tions and payable in assets or servi!es in t'e future.
22. ?'i!' of t'e follo0ing is a !urrent liabilityE
a. ) long-term debt maturing !urrently@ 0'i!' is to be paid 0it' !as' in a sin+ing fund
b. ) long-term debt maturing !urrently@ 0'i!' is to be retired 0it' pro!eeds from a ne0
debt issue
!. ) long-term debt maturing !urrently@ 0'i!' is to be !onverted into !ommon sto!+
d. "one of t'ese
23. ?'i!' of t'e follo0ing is true about a!!ounts payableE
1. )!!ounts payable s'ould not be reported at t'eir present value.
2. ?'en a!!ounts payable are re!orded at t'e net amount@ a #ur!'ase Dis!ounts
a!!ount 0ill be used.
3. ?'en a!!ounts payable are re!orded at t'e gross amount@ a #ur!'ase
Dis!ounts 5ost a!!ount 0ill be used.
a. 1
b. 2
!. 3
d. 2ot' 2 and 3 are true.
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24. )mong t'e s'ort-term obligations of 5an!e %ompany as of De!ember 31@ t'e balan!e
s'eet date@ are notes payable totaling F2$.@... 0it' t'e 7adison "ational 2an+. T'ese
are ,.-day notes@ rene0able for anot'er ,.-day period. T'ese notes s'ould be !lassified
on t'e balan!e s'eet of 5an!e %ompany as
a. !urrent liabilities.
b. deferred !'arges.
!. long-term liabilities.
d. intermediate debt.
2$. ?'i!' of t'e follo0ing is not true about t'e dis!ount on s'ort-term notes payableE
a. T'e Dis!ount on "otes #ayable a!!ount 'as a debit balan!e.
b. T'e Dis!ount on "otes #ayable a!!ount s'ould be reported as an asset on t'e
balan!e s'eet.
!. ?'en t'ere is a dis!ount on a note payable@ t'e effe!tive interest rate is 'ig'er t'an
t'e stated dis!ount rate.
d. )ll of t'ese are true.
2&. ?'i!' of t'e follo0ing may be a !urrent liabilityE
a. ?it''eld 1n!ome Taxes
b. Deposits e!eived from %ustomers
!. Deferred evenue
d. )ll of t'ese
2(. ?'i!' of t'e follo0ing items is a !urrent liabilityE
a. 2onds <for 0'i!' t'ere is an ade8uate sin+ing fund properly !lassified as a long-term
investment= due in t'ree mont's.
b. 2onds due in t'ree years.
!. 2onds <for 0'i!' t'ere is an ade8uate appropriation of retained earnings= due in
eleven mont's.
d. 2onds to be refunded 0'en due in eig't mont's@ t'ere being no doubt about t'e
mar+etability of t'e refunding issue.
2*. ?'i!' of t'e follo0ing s'ould not be in!luded in t'e !urrent liabilities se!tion of t'e
balan!e s'eetE
a. Trade notes payable
b. -'ort-term /ero-interest-bearing notes payable
!. T'e dis!ount on s'ort-term notes payable
d. )ll of t'ese are in!luded
2,. ?'i!' of t'e follo0ing is a !urrent liabilityE
a. #referred dividends in arrears
b. ) dividend payable in t'e form of additional s'ares of sto!+
!. ) !as' dividend payable to preferred sto!+'olders
d. )ll of t'ese
3.. -to!+ dividends distributable s'ould be !lassified on t'e
a. in!ome statement as an expense.
b. balan!e s'eet as an asset.
!. balan!e s'eet as a liability.
d. balan!e s'eet as an item of sto!+'olders4 e8uity.
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31. Gf t'e follo0ing items@ t'e only one 0'i!' s'ould not be !lassified as a !urrent liability is
a. !urrent maturities of long-term debt.
b. sales taxes payable.
!. s'ort-term obligations expe!ted to be refinan!ed.
d. unearned revenues.
32. )n a!!ount 0'i!' 0ould be !lassified as a !urrent liability is
a. dividends payable in t'e !ompany4s sto!+.
b. a!!ounts payableHdebit balan!es.
!. losses expe!ted to be in!urred 0it'in t'e next t0elve mont's in ex!ess of t'e
!ompany4s insuran!e !overage.
d. none of t'ese.
33. ?'i!' of t'e follo0ing statements is !orre!tE
a. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm
intends to refinan!e t'e obligation on a long-term basis.
b. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm !an
demonstrate an ability to !onsummate a refinan!ing.
!. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if it is paid off
after t'e balan!e s'eet date and subse8uently repla!ed by long-term debt before t'e
balan!e s'eet is issued.
d. "one of t'ese.
34. T'e ability to !onsummate t'e refinan!ing of a s'ort-term obligation may be demon-
strated by
a. a!tually refinan!ing t'e obligation by issuing a long-term obligation after t'e date of
t'e balan!e s'eet but before it is issued.
b. entering into a finan!ing agreement t'at permits t'e enterprise to refinan!e t'e debt
on a long-term basis.
!. a!tually refinan!ing t'e obligation by issuing e8uity se!urities after t'e date of t'e
balan!e s'eet but before it is issued.
d. all of t'ese.
3$. ?'i!' of t'e follo0ing statements is false?
a. ) !ompany may ex!lude a s'ort-term obligation from !urrent liabilities if t'e firm
intends to refinan!e t'e obligation on a long-term basis and demonstrates an ability to
!omplete t'e refinan!ing.
b. %as' dividends s'ould be re!orded as a liability 0'en t'ey are de!lared by t'e board
of dire!tors.
!. Dnder t'e !as' basis met'od@ 0arranty !osts are !'arged to expense as t'ey are paid.
d. F1%) taxes 0it''eld from employees4 payroll !'e!+s s'ould never be re!orded as a
liability sin!e t'e employer 0ill eventually remit t'e amounts 0it''eld to t'e
appropriate taxing aut'ority.
3&. ?'i!' of t'e follo0ing is not a !orre!t statement about sales taxesE
a. -ales taxes are an expense of t'e seller.
b. 7any !ompanies re!ord sales taxes in t'e sales a!!ount.
!. 1f sales taxes are in!luded in t'e sales a!!ount@ t'e first step to find t'e amount of
sales taxes is to divide sales by 1 plus t'e sales tax rate.
d. )ll of t'ese are true.
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-
3(. 1f a s'ort-term obligation is ex!luded from !urrent liabilities be!ause of refinan!ing@ 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 des!ription of t'e finan!ing arrangement.
b. t'e terms of t'e ne0 obligation in!urred or to be in!urred.
!. t'e terms of any e8uity se!urity issued or to be issued.
d. t'e number of finan!ing institutions t'at refused to refinan!e t'e debt@ if any.
-
3*. 1n a!!ounting for !ompensated absen!es@ t'e differen!e bet0een vested rig'ts and
a!!umulated rig'ts is
a. vested rig'ts are normally for a longer period of employment t'an are a!!umulated
rig'ts.
b. vested rig'ts are not !ontingent upon an employee4s future servi!e.
!. vested rig'ts are a legal and binding obligation on t'e !ompany@ 0'ereas a!!umulated
rig'ts expire at t'e end of t'e a!!ounting period in 0'i!' t'ey arose.
d. vested rig'ts !arry a stipulated dollar amount t'at is o0ed to t'e employeeI
a!!umulated rig'ts do not represent monetary !ompensation.
#
3,. )n employee4s net <or ta+e-'ome= pay is determined by gross earnings minus amounts for
in!ome tax 0it''oldings and t'e employee4s
a. portion of F1%) taxes@ and unemployment taxes.
b. and employer4s portion of F1%) taxes@ and unemployment taxes.
!. portion of F1%) taxes@ unemployment taxes@ and any voluntary dedu!tions.
d. portion of F1%) taxes@ and any voluntary dedu!tions.
4.. ?'i!' of t'ese is not in!luded in an employer4s payroll tax expenseE
a. F.1.%.). <so!ial se!urity= taxes
b. Federal unemployment taxes
!. -tate unemployment taxes
d. Federal in!ome taxes
41. ?'i!' of t'e follo0ing is a !ondition for a!!ruing a liability for t'e !ost of !ompensation for
future absen!esE
a. T'e obligation relates to t'e rig'ts t'at vest or a!!umulate.
b. #ayment of t'e !ompensation is probable.
!. T'e obligation is attributable to employee servi!es already performed.
d. )ll of t'ese are !onditions for t'e a!!rual.
42. ) liability for !ompensated absen!es su!' as va!ations@ for 0'i!' it is expe!ted t'at
employees 0ill be paid@ s'ould
a. be a!!rued during t'e period 0'en t'e !ompensated time is expe!ted to be used by
employees.
b. be a!!rued during t'e period follo0ing vesting.
!. be a!!rued during t'e period 0'en earned.
d. not be a!!rued unless a 0ritten !ontra!tual obligation exists.
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43. T'e amount of t'e liability for !ompensated absen!es s'ould be based on
1. t'e !urrent rates of pay in effe!t 0'en employees earn t'e rig't to
!ompensated absen!es.
2. t'e future rates of pay expe!ted to be paid 0'en employees use
!ompensated time.
3. t'e present value of t'e amount expe!ted to be paid in future periods.
a. 1.
b. 2.
!. 3.
d. Eit'er 1 or 2 is a!!eptable.
44. ?'i!' of t'e follo0ing is t'e proper 0ay to report a gain !ontingen!yE
a. )s an a!!rued amount.
b. )s deferred revenue.
!. )s an a!!ount re!eivable 0it' additional dis!losure explaining t'e nature of t'e
!ontingen!y.
d. )s a dis!losure only.
4$. ?'i!' of t'e follo0ing !ontingen!ies need not be dis!losed in t'e finan!ial statements or
t'e notes t'eretoE
a. #robable losses not reasonably estimable
b. Environmental liabilities t'at !annot be reasonably estimated
!. 9uarantees of indebtedness of ot'ers
d. )ll of t'ese must be dis!losed.
4&. ?'i!' of t'e follo0ing sets of !onditions 0ould give rise to t'e a!!rual of a !ontingen!y
under !urrent generally a!!epted a!!ounting prin!iplesE
a. )mount of loss is reasonably estimable and event o!!urs infre8uently.
b. )mount of loss is reasonably estimable and o!!urren!e of event is probable.
!. Event is unusual in nature and o!!urren!e of event is probable.
d. Event is unusual in nature and event o!!urs infre8uently.
4(. 7ar+ ?ard is a farmer 0'o o0ns land 0'i!' borders on t'e rig't-of-0ay of t'e "ort'ern
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
years !on!erning t'e o0ners'ip of a small par!el of land. T'e representative of t'e
ailroad 'as offered to assign any rig'ts 0'i!' t'e ailroad may 'ave in t'e land to ?ard
in ex!'ange for a release of 'is rig't to reimbursement for t'e loss 'e 'as sustained from
t'e fire. ?ard appears in!lined to a!!ept t'e ailroad4s offer. T'e ailroad4s 2..( finan!ial
statements s'ould in!lude t'e follo0ing related to t'e in!identA
a. re!ognition of a loss and !reation of a liability for t'e value of t'e land.
b. re!ognition of a loss only.
!. !reation of a liability only.
d. dis!losure in note form only.
4*. ) !ontingen!y !an be a!!rued 0'en
a. it is !ertain t'at funds are available to settle t'e disputed amount.
b. an asset may 'ave been impaired.
!. t'e amount of t'e loss !an be reasonably estimated and it is probable t'at an asset
'as been impaired or a liability in!urred.
d. it is probable t'at an asset 'as been impaired or a liability in!urred even t'oug' t'e
amount of t'e loss !annot be reasonably estimated.
13 - 11
4,. ) !ontingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is a!!rued even t'oug' not reasonably estimated.
!. is not dis!losed in t'e finan!ial statements.
d. is t'e result of a loss !ontingen!y.
$.. To re!ord an asset retirement obligation <)G=@ t'e !ost asso!iated 0it' t'e )G is
a. expensed.
b. in!luded in t'e !arrying amount of t'e related long-lived asset.
!. in!luded in a separate a!!ount.
d. none of t'ese.
$1. ) !ompany is legally obligated for t'e !osts asso!iated 0it' t'e retirement of a long-lived
asset
a. only 0'en it 'ires anot'er party to perform t'e retirement a!tivities.
b. only if it performs t'e a!tivities 0it' its o0n 0or+for!e and e8uipment.
!. 0'et'er it 'ires anot'er party to perform t'e retirement a!tivities or performs t'e
a!tivities itself.
d. 0'en it is probable t'e asset 0ill be retired.
$2. )ssume t'at a manufa!turing !orporation 'as <1= good 8uality !ontrol@ <2= a one-year
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 !osts. )ny liability for t'e 0arranty
a. s'ould be reported as long-term.
b. s'ould be reported as !urrent.
!. s'ould be reported as part !urrent and part long-term.
d. need not be dis!losed.
$3. 5ope/ %orporation@ a manufa!turer of 'ouse'old paints@ is preparing annual finan!ial
statements at De!ember 31@ 2..(. 2e!ause of a re!ently proven 'ealt' 'a/ard in one of
its paints@ t'e government 'as !learly indi!ated its intention of 'aving 5ope/ re!all all !ans
of t'is paint sold in t'e last six mont's. T'e management of 5ope/ estimates t'at t'is
re!all 0ould !ost F*..@.... ?'at a!!ounting re!ognition@ if any@ s'ould be a!!orded t'is
situationE
a. "o re!ognition
b. "ote dis!losure only
!. Gperating expense of F*..@... and liability of F*..@...
d. )ppropriation of retained earnings of F*..@...
$4. 1nformation available prior to t'e issuan!e of t'e finan!ial statements indi!ates t'at it is
probable t'at@ at t'e date of t'e finan!ial statements@ a liability 'as been in!urred for
obligations related to produ!t 0arranties. T'e amount of t'e loss involved !an be
reasonably estimated. 2ased on t'e above fa!ts@ an estimated loss !ontingen!y s'ould be
a. a!!rued.
b. dis!losed but not a!!rued.
!. neither a!!rued nor dis!losed.
d. !lassified as an appropriation of retained earnings.
13 - 1/
#
$$. 7ayberry %o. 'as a loss !ontingen!y to a!!rue. T'e loss amount !an only be reasonably
estimated 0it'in a range of out!omes. "o single amount 0it'in t'e range is a better
estimate t'an any ot'er amount. T'e amount of loss a!!rual s'ould be
a. /ero.
b. t'e minimum of t'e range.
!. t'e mean of t'e range.
d. t'e maximum of t'e range.
-
$&. 7arx %ompany be!omes a0are of a la0suit after t'e date of t'e finan!ial statements@ 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 %ompany admits guilt.
b. t'e !ourt 0ill de!ide t'e !ase 0it'in one year.
!. t'e damages appear to be material.
d. t'e !ause for a!tion o!!urred during t'e a!!ounting period !overed by t'e finan!ial
statements.
-
$(. Dse of t'e a!!rual met'od in a!!ounting for produ!t 0arranty !osts
a. is re8uired for federal in!ome tax purposes.
b. is fre8uently :ustified on t'e basis of expedien!y 0'en 0arranty !osts are immaterial.
!. finds t'e expense a!!ount being !'arged 0'en t'e seller performs in !omplian!e 0it'
t'e 0arranty.
d. represents a!!epted pra!ti!e and s'ould be used 0'enever t'e 0arranty is an integral
and inseparable part of t'e sale.
-
$*. ?'i!' of t'e follo0ing is not a!!eptable treatment for t'e presentation of !urrent
liabilitiesE
a. 5isting !urrent liabilities in order of maturity
b. 5isting !urrent liabilities a!!ording to amount
!. Gffsetting !urrent liabilities against assets t'at are to be applied to t'eir li8uidation
d. -'o0ing !urrent liabilities immediately belo0 !urrent assets to obtain a presentation of
0or+ing !apital
#
$,. T'e ratio of !urrent assets to !urrent liabilities is !alled t'e
a. !urrent ratio.
b. a!id-test ratio.
!. !urrent asset turnover ratio.
d. !urrent liability turnover ratio.
&.. )!!rued liabilities are dis!losed in finan!ial statements by
a. a footnote to t'e statements.
b. s'o0ing t'e amount among t'e liabilities but not extending it to t'e liability total.
!. an appropriation of retained earnings.
d. appropriately !lassifying t'em as regular liabilities in t'e balan!e s'eet.
&1. T'e numerator of t'e a!id-test ratio !onsists of
a. total !urrent assets.
b. !as' and mar+etable se!urities.
!. !as' and net re!eivables.
d. !as'@ mar+etable se!urities@ and net re!eivables.
13 - 13
6&2. ?'i!' of t'e follo0ing is not a permissible met'od of !al!ulating a bonus to an employeeE
a. T'e bonus is based on in!ome before dedu!tions for t'e bonus and in!ome taxes.
b. T'e bonus is based on in!ome after dedu!tion of t'e bonus but before dedu!tion of
in!ome taxes.
!. T'e bonus is based on in!ome after dedu!tions for t'e bonus and in!ome taxes.
d. )ll of t'ese are permissible.
%ult$ple C,o$ce An!e"Conceptual
Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An#
21. d 2(. ! 33. d 3,. d 4$. d $1. ! $(. d
22. d 2*. d 34. d 4.. d 4&. b $2. ! $*. !
23. a 2,. ! 3$. d 41. d 4(. a $3. ! $,. a
24. a 3.. d 3&. a 42. ! 4*. ! $4. a &.. d
2$. b 31. ! 3(. d 43. d 4,. d $$. b &1. d
2&. d 32. d 3*. b 44. d $.. b $&. d 6&2. d
-olutions to t'ose 7ultiple %'oi!e 8uestions for 0'i!' t'e ans0er is Jnone of t'ese.K
22. ) long-term debt maturing !urrently to be paid 0it' !urrent assets is a !urrent liability.
32. )!!ounts #ayable@ ?ages #ayable@ et!.@ 0ould be examples of !urrent liabilities.
33. T'e !ompany must bot' intend to refinan!e t'e obligation on a long-term basis and
demonstrate t'e ability to !onsummate t'e refinan!ing to ex!lude a s'ort-term obligation
from !urrent liabilities.
%ULTIPLE CHOICECo(putat$onal
&3. Edson %orp. signed a t'ree-mont'@ /ero-interest-bearing note on "ovember 1@ 2..( for
t'e pur!'ase of F1$.@... of inventory. T'e fa!e value of t'e note 0as F1$2@2.$.
)ssuming Edson used a JDis!ount on "ote #ayableK a!!ount to initially re!ord t'e note
and t'at t'e dis!ount 0ill be amorti/ed e8ually over t'e 3-mont' period@ t'e ad:usting
entry made at De!ember 31@ 2..( 0ill in!lude a
a. debit to Dis!ount on "ote #ayable for F(3$.
b. debit to 1nterest Expense for F1@4(..
!. !redit to Dis!ount on "ote #ayable for F(3$.
d. !redit to 1nterest Expense for F1@4(..
&4. T'e effe!tive interest on a 12-mont'@ /ero-interest-bearing note payable of F3..@...@
dis!ounted at t'e ban+ at 1.L is
a. 1..*(L.
b. 1.L.
!. ,..,L.
d. 11.11L.
13 - 13
&$. Gn February 1.@ 2..(@ after issuan!e of its finan!ial statements for 2..&@ Flynn %ompany
entered into a finan!ing agreement 0it' 5ebo 2an+@ allo0ing Flynn %ompany to borro0 up
to F4@...@... at any time t'roug' 2..,. )mounts borro0ed under t'e agreement bear
interest at 2L above t'e ban+4s prime interest rate and mature t0o years from t'e date of
loan. Flynn %ompany presently 'as F1@$..@... of notes payable 0it' First "ational 2an+
maturing 7ar!' 1$@ 2..(. T'e !ompany intends to borro0 F2@$..@... under 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 F&@...@... and
pro'ibits t'e payment of dividends on !ommon sto!+ 0it'out prior approval by 5ebo 2an+.
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. F..
b. F1@$..@....
!. F2@...@....
d. F4@...@....
&&. Gn De!ember 31@ 2..&@ Frye %o. 'as F2@...@... of s'ort-term notes payable due on
February 14@ 2..(. Gn Manuary 1.@ 2..(@ Frye arranged a line of !redit 0it' %ounty 2an+
0'i!' allo0s Frye to borro0 up to F1@$..@... at one per!ent above t'e prime rate for
t'ree years. Gn February 2@ 2..(@ Frye borro0ed F1@2..@... from %ounty 2an+ and used
F$..@... additional !as' to li8uidate F1@(..@... 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!' $@ 2..( is
a. F..
b. F3..@....
!. F$..@....
d. F*..@....
Dse t'e follo0ing information for 8uestions &( and &*.
aney %o. is a retail store operating in a state 0it' a &L retail sales tax. T'e retailer may +eep
2L of t'e sales tax !olle!ted. aney %o. re!ords t'e sales tax in t'e -ales a!!ount. T'e amount
re!orded in t'e -ales a!!ount during 7ay 0as F14*@4...
&(. T'e amount of sales taxes <to t'e nearest dollar= for 7ay is
a. F*@(2&.
b. F*@4...
!. F*@,.4.
d. F,@43*.
&*. T'e amount of sales taxes payable <to t'e nearest dollar= to t'e state for t'e mont' of
7ay is
a. F*@$$1.
b. F*@232.
!. F*@(2&.
d. F,@24,.
13 - 19
&,. Trent@ 1n!.@ is a retail store operating in a state 0it' a $L retail sales tax. T'e state 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 mont'. 1f t'e amount !olle!ted is 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 F*1@4*. tax to t'e state tax division for 7ar!' 2..( retail
sales. ?'at 0as Trent 4s 7ar!' 2..( retail sales sub:e!t to sales taxE
a. F1@&2,@&...
b. F1@$,&@....
!. F1@&*.@....
d. F1@&4$@....
(.. Nolbert %orporation 'as F2@$..@... of s'ort-term debt it expe!ts to retire 0it' pro!eeds
from t'e sale of ($@... s'ares of !ommon sto!+. 1f t'e sto!+ is sold for F2. 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 liabilitiesE
a. F1@$..@...
b. F2@$..@...
!. F1@...@...
d. F.
(1. 9rogan %orporation 'as F1@*..@... of s'ort-term debt it expe!ts to retire 0it' pro!eeds
from t'e sale of &.@... s'ares of !ommon sto!+. 1f t'e sto!+ is sold for F2. 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 liabilitiesE
a. F1@2..@...
b. F1@*..@...
!. F&..@...
d. F.
(2. Timmons %o.@ 0'i!' 'as a taxable payroll of F$..@...@ is sub:e!t to FDT) tax of &.2L and
a state !ontribution rate of $.4L. No0ever@ be!ause of stable employment experien!e@ t'e
!ompanyCs state rate 'as been redu!ed to 2L. ?'at is t'e total amount of federal and
state unemployment tax for Timmons %o.E
a. F$*@$..
b. F41@...
!. F2.@...
d. F14@...
(3. Dnru' %o.@ 0'i!' 'as a taxable payroll of F4..@...@ is sub:e!t to FDT) tax of &.2L and a
state !ontribution rate of $.4L. No0ever@ be!ause of stable employment experien!e@ t'e
!ompanyCs state rate 'as been redu!ed to 2L. ?'at is t'e total amount of federal and
state unemployment tax for Dnru' %o.E
a. F4&@*..
b. F32@*..
!. F1&@...
d. F11@2..
13 - 1:
(4. ) !ompany gives ea!' of its $. employees <assume t'ey 0ere all employed !ontinuously
t'roug' 2..( and 2..*= 12 days of va!ation a year if t'ey are employed at t'e end of t'e
year. T'e va!ation a!!umulates and may be ta+en starting Manuary 1 of t'e next year.
T'e employees 0or+ * 'ours per day. 1n 2..(@ t'ey made F14 per 'our and in 2..* t'ey
made F1& per 'our. During 2..*@ t'ey too+ an average of , days of va!ation ea!'. T'e
!ompanyCs poli!y is to re!ord t'e liability existing at t'e end of ea!' year at t'e 0age rate
for t'at year. ?'at amount of va!ation liability 0ould be refle!ted on t'e 2..( and 2..*
balan!e s'eets@ respe!tivelyE
a. F&(@2..I F,3@&..
b. F(&@*..I F,&@...
!. F&(@2..I F,&@...
d. F(&@*..I F,3@&..
($. ) !ompany gives ea!' of its $. employees <assume t'ey 0ere all employed !ontinuously
t'roug' 2..( and 2..*= 12 days of va!ation a year if t'ey are employed at t'e end of t'e
year. T'e va!ation a!!umulates and may be ta+en starting Manuary 1 of t'e next year.
T'e employees 0or+ * 'ours per day. 1n 2..(@ t'ey made F1(.$. per 'our and in 2..*
t'ey made F2. per 'our. During 2..*@ t'ey too+ an average of , days of va!ation ea!'.
T'e !ompanyCs poli!y is to re!ord t'e liability existing at t'e end of ea!' year at t'e 0age
rate for t'at year. ?'at amount of va!ation liability 0ould be refle!ted on t'e 2..( and
2..* balan!e s'eets@ respe!tivelyE
a. F*4@...I F11(@...
b. F,&@...I F12.@...
!. F*4@...I F12.@...
d. F,&@...I F11(@...
(&. T'e total payroll of ?aters %ompany for t'e mont' of G!tober@ 2..( 0as F3&.@...@ of
0'i!' F,.@... represented amounts paid in ex!ess of F,.@... to !ertain employees.
F3..@... represented amounts paid to employees in ex!ess of t'e F(@... maximum
sub:e!t to unemployment taxes. F,.@... of federal in!ome taxes and F,@... of union
dues 0ere 0it''eld. T'e state unemployment tax is 1L@ t'e federal unemployment tax is .
*L@ and t'e !urrent F.1.%.). tax is (.&$L on an employeeCs 0ages to F,.@... and 1.4$L
in ex!ess of F,.@.... ?'at amount s'ould ?aters re!ord as payroll tax expenseE
a. F11*@&2..
b. F113@.4..
!. F23@.4..
d. F2*@44..
Dse t'e follo0ing information for 8uestions (( and (*.
-imson %ompany 'as 3$ employees 0'o 0or+ *-'our days and are paid 'ourly. Gn Manuary 1@
2..&@ t'e !ompany began a program of granting its employees 1. days of paid va!ation ea!'
year. 3a!ation days earned in 2..& may first be ta+en on Manuary 1@ 2..(. 1nformation relative to
t'ese employees is as follo0sA
Nourly 3a!ation Days Earned 3a!ation Days Dsed
Oear ?ages by Ea!' Employee by Ea!' Employee
2..& F2$.*. 1. .
2..( 2(... 1. *
2..* 2*.$. 1. 1.
-imson 'as !'osen to a!!rue t'e liability for !ompensated absen!es at t'e !urrent rates of pay in
effe!t 0'en t'e !ompensated time is earned.
13 - 1<
((. ?'at is t'e amount of expense relative to !ompensated absen!es t'at s'ould be reported
on -imsonCs in!ome statement for 2..&E
a. F..
b. F&*@**..
!. F($@&...
d. F(2@24..
(*. ?'at is t'e amount of t'e a!!rued liability for !ompensated absen!es t'at s'ould be
reported at De!ember 31@ 2..*E
a. F,4@,2..
b. F,.@(2..
!. F(,@*...
d. F,$@(&..
(,. ) !ompany offers a !as' rebate of F1 on ea!' F4 pa!+age of lig't bulbs sold during 2..(.
Nistori!ally@ 1.L of !ustomers mail in t'e rebate form. During 2..(@ 4@...@... pa!+ages
of lig't bulbs are sold@ and 14.@... F1 rebates are mailed to !ustomers. ?'at is t'e
rebate expense and liability@ respe!tively@ s'o0n on t'e 2..( finan!ial statements dated
De!ember 31E
a. F4..@...I F4..@...
b. F4..@...I F2&.@...
!. F2&.@...I F2&.@...
d. F14.@...I F2&.@...
*.. ) !ompany buys an oil rig for F1@...@... on Manuary 1@ 2..(. T'e life of t'e rig is 1.
years and t'e expe!ted !ost to dismantle t'e rig at t'e end of 1. years is F2..@...
<present value at 1.L is F((@11.=. 1.L is an appropriate interest rate for t'is !ompany.
?'at expense s'ould be re!orded for 2..( as a result of t'ese eventsE
a. Depre!iation expense of F12.@...
b. Depre!iation expense of F1..@... and interest expense of F(@(11
!. Depre!iation expense of F1..@... and interest expense of F2.@...
d. Depre!iation expense of F1.(@(1. and interest expense of F(@(11
*1. ?ellman %ompany self insures its property for fire and storm damage. 1f t'e !ompany
0ere to obtain insuran!e on t'e property@ it 0ould !ost t'em F1@...@... per year. T'e
!ompany estimates t'at on average it 0ill in!ur losses of F*..@... per year. During 2..(@
F3$.@... 0ort' of losses 0ere sustained. No0 mu!' total expense and;or loss s'ould be
re!ogni/ed by ?ellman %ompany for 2..(E
a. F3$.@... in losses and no insuran!e expense
b. F3$.@... in losses and F4$.@... in insuran!e expense
!. F. in losses and F*..@... in insuran!e expense
d. F. in losses and F1@...@... in insuran!e expense
*2. ) !ompany offers a !as' rebate of F1 on ea!' F4 pa!+age of batteries sold during 2..(.
Nistori!ally@ 1.L of !ustomers mail in t'e rebate form. During 2..(@ &@...@... pa!+ages
of batteries are sold@ and 21.@... F1 rebates are mailed to !ustomers. ?'at is t'e rebate
expense and liability@ respe!tively@ s'o0n on t'e 2..( finan!ial statements dated
De!ember 31E
a. F&..@...I F&..@...
b. F&..@...I F3,.@...
!. F3,.@...I F3,.@...
d. F21.@...I F3,.@...
13 - 1=
*3. ) !ompany buys an oil rig for F2@...@... on Manuary 1@ 2..(. T'e life of t'e rig is 1.
years and t'e expe!ted !ost to dismantle t'e rig at t'e end of 1. years is F4..@...
<present value at 1.L is F1$4@22.=. 1.L is an appropriate interest rate for t'is !ompany.
?'at expense s'ould be re!orded for 2..( as a result of t'ese eventsE
a. Depre!iation expense of F24.@...
b. Depre!iation expense of F2..@... and interest expense of F1$@422
!. Depre!iation expense of F2..@... and interest expense of F4.@...
d. Depre!iation expense of F21$@42. and interest expense of F1$@422
*4. During 2..&@ Oounger %o. introdu!ed a ne0 line of ma!'ines t'at !arry a t'ree-year
0arranty against manufa!turerCs defe!ts. 2ased on industry experien!e@ 0arranty !osts
are 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
2..& F &..@... F ,@...
2..( 1@$..@... 4$@...
2..* 2@1..@... 13$@...
F4@2..@... F1*,@...
?'at amount s'ould Oounger report as a liability at De!ember 31@ 2..*E
a. F.
b. F1$@...
!. F2.4@...
d. F31$@...
*$. 7ilner Frosted Fla+es %ompany offers its !ustomers a pottery !ereal bo0l if t'ey send in 3
boxtops from 7ilner Frosted Fla+es boxes and F1.... T'e !ompany estimates t'at &.L of
t'e boxtops 0ill be redeemed. 1n 2..(@ t'e !ompany sold &($@... boxes of Frosted
Fla+es and !ustomers redeemed 33.@... boxtops re!eiving 11.@... bo0ls. 1f t'e bo0ls
!ost 7ilner %ompany F2.$. ea!'@ 'o0 mu!' liability for outstanding premiums s'ould be
re!orded at t'e end of 2..(E
a. F2$@...
b. F3(@$..
!. F&2@$..
d. F*(@$..
*&. During 2..&@ 3enable %o. introdu!ed a ne0 line of ma!'ines t'at !arry a t'ree-year
0arranty against manufa!turerCs defe!ts. 2ased on industry experien!e@ 0arranty !osts
are 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
2..& F 4..@... F &@...
2..( 1@...@... 3.@...
2..* 1@4..@... ,.@...
F2@*..@... F12&@...
?'at amount s'ould 3enable report as a liability at De!ember 31@ 2..*E
a. F.
b. F1.@...
!. F13&@...
d. F21.@...
13 - 1>
*(. #ryor Frosted Fla+es %ompany offers its !ustomers a pottery !ereal bo0l if t'ey send in 4
boxtops from #ryor Frosted Fla+es boxes and F1.... T'e !ompany estimates t'at &.L of
t'e boxtops 0ill be redeemed. 1n 2..(@ t'e !ompany sold $..@... boxes of Frosted
Fla+es and !ustomers redeemed 22.@... boxtops re!eiving $$@... bo0ls. 1f t'e bo0ls
!ost #ryor %ompany F2.$. ea!'@ 'o0 mu!' liability for outstanding premiums s'ould be
re!orded at t'e end of 2..(E
a. F2.@...
b. F3.@...
!. F$.@...
d. F(.@...
Dse t'e follo0ing information for 8uestions **@ *,@ and ,..
>ent %o. in!ludes one !oupon in ea!' bag of dog food it sells. 1n return for eig't !oupons@
!ustomers re!eive a leas'. T'e leas'es !ost >ent F2... ea!'. >ent estimates t'at 4. per!ent of
t'e !oupons 0ill be redeemed. Data for 2..& and 2..( are as follo0sA
2..& 2..(
2ags of dog food sold $..@... &..@...
5eas'es pur!'ased 1*@... 22@...
%oupons redeemed 12.@... 1$.@...
**. T'e premium expense for 2..& is
a. F2$@....
b. F3.@....
!. F3$@....
d. F$.@....
*,. T'e estimated liability for premiums at De!ember 31@ 2..& is
a. F(@$...
b. F1.@....
!. F1(@$...
d. F2.@....
,.. T'e estimated liability for premiums at De!ember 31@ 2..( is
a. F11@2$..
b. F21@2$..
!. F22@$...
d. F42@$...
,1. 3ernon %o. is being sued for illness !aused to lo!al residents as a result of negligen!e on
t'e !ompany4s part in permitting t'e lo!al residents to be exposed to 'ig'ly toxi!
!'emi!als from its plant. 3ernon4s la0yer states t'at it is probable t'at 3ernon 0ill lose t'e
suit and be found liable for a :udgment !osting 3ernon any0'ere from F1@2..@... to
F&@...@.... No0ever@ t'e la0yer states t'at t'e most probable !ost is F3@&..@.... )s a
result of t'e above fa!ts@ 3ernon s'ould a!!rue
a. a loss !ontingen!y of F1@2..@... and dis!lose an additional !ontingen!y of up to
F4@*..@....
b. a loss !ontingen!y of F3@&..@... and dis!lose an additional !ontingen!y of up to
F2@4..@....
!. a loss !ontingen!y of F3@&..@... but not dis!lose any additional !ontingen!y.
d. no loss !ontingen!y but dis!lose a !ontingen!y of F1@2..@... to F&@...@....
13 - /?
,2. 7oore %ompany estimates its annual 0arranty expense as 4L of annual net sales. T'e
follo0ing data relate to t'e !alendar year 2..(A
"et sales F1@$..@...
?arranty liability a!!ount
2alan!e@ De!. 31@ 2..( F1.@... debit before ad:ustment
2alan!e@ De!. 31@ 2..( $.@... !redit after ad:ustment
?'i!' one of t'e follo0ing entries 0as made to re!ord t'e 2..( estimated 0arranty
expenseE
a. ?arranty Expense .............................................................. &.@...
etained Earnings <prior-period ad:ustment= ............ 1.@...
?arranty 5iability ...................................................... $.@...
b. ?arranty Expense .............................................................. $.@...
etained Earnings <prior-period ad:ustment= ...................... 1.@...
?arranty 5iability ...................................................... &.@...
!. ?arranty Expense .............................................................. 4.@...
?arranty 5iability ...................................................... 4.@...
d. ?arranty Expense .............................................................. &.@...
?arranty 5iability ...................................................... &.@...
,3. 1n 2..&@ -limon %orporation began selling a ne0 line of produ!ts t'at !arry a t0o-year
0arranty against defe!ts. 2ased upon past experien!e 0it' ot'er produ!ts@ t'e estimated
0arranty !osts related to dollar sales are as follo0sA
First year of 0arranty 2L
-e!ond year of 0arranty $L
-ales and a!tual 0arranty expenditures for 2..& and 2..( are presented belo0A
2..& 2..(
-ales F3..@... F4..@...
)!tual 0arranty expenditures 1.@... 2.@...
?'at is t'e estimated 0arranty liability at t'e end of 2..(E
a. F1,@....
b. F2,@....
!. F4,@....
d. F*@....
,4. Gn Manuary 3@ 2..(@ )lton %orp. o0ned a ma!'ine t'at 'ad !ost F2..@.... T'e
a!!umulated depre!iation 0as F12.@...@ estimated salvage value 0as F12@...@ and fair
mar+et value 0as F32.@.... Gn Manuary 4@ 2..(@ t'is ma!'ine 0as irreparably damaged
by eed %orp. and be!ame 0ort'less. 1n G!tober 2..(@ a !ourt a0arded damages of
F32.@... against eed in favor of )lton. )t De!ember 31@ 2..(@ t'e final out!ome of t'is
!ase 0as a0aiting appeal and 0as@ t'erefore@ un!ertain. No0ever@ in t'e opinion of )ltonCs
attorney@ eedCs appeal 0ill be denied. )t De!ember 31@ 2..(@ 0'at amount s'ould )lton
a!!rue for t'is gain !ontingen!yE
a. F32.@....
b. F2&.@....
!. F2..@....
d. F..
13 - /1
,$. Norton Food %ompany distributes to !onsumers !oupons 0'i!' may be presented <on or
before a stated expiration date= to gro!ers for dis!ounts on !ertain produ!ts of Norton.
T'e gro!ers are reimbursed 0'en t'ey send t'e !oupons to Norton. 1n Norton4s
experien!e@ $.L of su!' !oupons are redeemed@ and generally one mont' elapses
bet0een t'e date a gro!er re!eives a !oupon from a !onsumer and t'e date Norton
re!eives it. During 2..( Norton issued t0o separate series of !oupons as follo0sA
%onsumer )mount Disbursed
1ssued Gn Total 3alue Expiration Date as of 12;31;.(
1;1;.( F3($@... &;3.;.( F1((@...
(;1;.( $4.@... 12;31;.( 22$@...
T'e only :ournal entries to date re!orded debits to !oupon expense and !redits to !as' of
F$3&@.... T'e De!ember 31@ 2..( balan!e s'eet s'ould in!lude a liability for
unredeemed !oupons of
a. F..
b. F4$@....
!. F,3@....
d. F2(.@....
,&. #resented belo0 is information available for "orton %ompany.
%urrent )ssets
%as' F 4@...
-'ort-term investments ($@...
)!!ounts re!eivable &1@...
1nventories 11.@...
#repaid expenses 3.@...
Total !urrent assets F2*.@...
Total !urrent liabilities are F12.@.... T'e a!id-test ratio for "orton is
a. 2.33 to 1.
b. 2..* to 1.
!. 1.1( to 1.
d. .$4 to 1.
Dse t'e follo0ing information for 8uestions 6,( and 6,*.
"orris %o. 'as a !ontra!t 0it' its president to pay 'er a $L bonus for 2..& and 2..(. T'e federal
in!ome tax rate is 3.L during t'ese t0o years.
6,(. 1n 2..&@ in!ome before dedu!tions for t'e bonus and federal in!ome taxes 0as F&..@....
1f t'e bonus is based on in!ome before dedu!tion of t'e bonus but after dedu!tion of
in!ome tax@ t'e bonus <to t'e nearest dollar= is
a. F2.@&,..
b. F21@....
!. F21@32..
d. F3.@....
6,*. 1n 2..(@ in!ome before dedu!tions for t'e bonus and federal in!ome taxes 0as F*..@....
1f t'e bonus is based on in!ome after dedu!tions for t'e bonus and in!ome tax@ t'e bonus
<to t'e nearest dollar= is
a. F2&@2,2.
b. F2&@&&&.
!. F2(@.$3.
d. F4.@....
13 - //
6,,. Farr #rodu!ts %orp. provides an in!entive !ompensation plan under 0'i!' its president
re!eives a bonus e8ual to 2.L of t'e !orporation4s in!ome in ex!ess of F3..@... before
in!ome tax but after t'e bonus. 1f in!ome before tax and bonus is F1@2..@... and t'e
effe!tive tax rate is 3.L@ t'e amount of t'e bonus 0ould be
a. F12&@....
b. F1$.@....
!. F1*.@....
d. F24.@....
%ult$ple C,o$ce An!e"Co(putat$onal
Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An#
&3. b &,. ! ($. ! *1. a *(. b ,3. a 6,,. b
&4. d (.. a (&. ! *2. b **. d ,4. d
&$. b (1. a ((. d *3. d *,. d ,$. b
&&. d (2. d (*. a *4. d ,.. d ,&. !
&(. b (3. d (,. b *$. b ,1. b 6,(. !
&*. b (4. ! *.. d *&. d ,2. d 6,*. !
%ULTIPLE CHOICECPA A)apte)
1... ?'i!' of t'e follo0ing is generally asso!iated 0it' payables !lassified as a!!ounts
payableE
#eriodi! #ayment -e!ured
of 1nterest by %ollateral
a. "o "o
b. "o Oes
!. Oes "o
d. Oes Oes
1.1. Gn Manuary 1@ 2..(@ Didde %o. leased a building to Ellis %orp. for a ten-year term at an
annual rental of F*.@.... )t in!eption of t'e lease@ Didde re!eived F32.@... !overing t'e
first t0o years4 rent of F1&.@... and a se!urity deposit of F1&.@.... T'is deposit 0ill not
be returned to Ellis upon expiration of t'e lease but 0ill be applied to payment of rent for
t'e last t0o years of t'e lease. ?'at portion of t'e F32.@... s'ould be s'o0n as a
!urrent and long-term liability@ respe!tively@ in Didde4s De!ember 31@ 2..( balan!e s'eetE
%urrent 5iability 5ong-term 5iability
a. F. F32.@...
b. F*.@... F1&.@...
!. F1&.@... F1&.@...
d. F1&.@... F*.@...
1.2. Gn -eptember 1@ 2..&@ 5ooper %o. issued a note payable to "ational 2an+ in t'e amount
of F1@2..@...@ bearing interest at 12L@ and payable in t'ree e8ual annual prin!ipal
payments of F4..@.... Gn t'is date@ t'e ban+4s prime rate 0as 11L. T'e first payment for
interest and prin!ipal 0as made on -eptember 1@ 2..(. )t De!ember 31@ 2..(@ 5ooper
s'ould re!ord a!!rued interest payable of
a. F4*@....
b. F44@....
!. F32@....
d. F2,@334.
13 - /3
1.3. 1n!luded in -auder %orp.4s liability a!!ount balan!es at De!ember 31@ 2..&@ 0ere t'e
follo0ingA
(L note payable issued G!tober 1@ 2..&@ maturing -eptember 3.@ 2..( F2$.@...
*L note payable issued )pril 1@ 2..&@ payable in six e8ual annual
installments of F1$.@... beginning )pril 1@ 2..( &..@...
-auder 4s De!ember 31@ 2..& finan!ial statements 0ere issued on 7ar!' 31@ 2..(. Gn
Manuary 1$@ 2..(@ t'e entire F&..@... balan!e of t'e *L note 0as refinan!ed by
issuan!e of a long-term obligation payable in a lump sum. 1n addition@ on 7ar!' 1.@ 2..(@
-auder !onsummated a non!an!elable agreement 0it' t'e lender to refinan!e t'e (L@
F2$.@... note on a long-term basis@ on readily determinable terms t'at 'ave not yet been
implemented. Gn t'e De!ember 31@ 2..& balan!e s'eet@ t'e amount of t'e notes payable
t'at -auder s'ould !lassify as s'ort-term obligations is
a. F1($@....
b. F12$@....
!. F$.@....
d. F..
1.4. 2arr %ompanyCs salaried employees are paid bi0ee+ly. G!!asionally@ advan!es made to
employees are paid ba!+ by payroll dedu!tions. 1nformation relating to salaries for t'e
!alendar year 2..( is as follo0sA
12;31;.& 12;31;.(
Employee advan!es F12@... F 1*@...
)!!rued salaries payable &$@... E
-alaries expense during t'e year &$.@...
-alaries paid during t'e year <gross= &2$@...
)t De!ember 31@ 2..(@ 0'at amount s'ould 2arr report for a!!rued salaries payableE
a. F,.@....
b. F*4@....
!. F(2@....
d. F2$@....
1.$. Puir+ %orp.4s payroll for t'e pay period ended G!tober 31@ 2..( is summari/ed as follo0sA
Federal )mount of ?ages -ub:e!t
Department Total 1n!ome Tax to #ayroll Taxes
#ayroll ?ages ?it''eld F.1.%.). Dnemployment
Fa!tory F ($@... F ,@... F(.@... F22@...
-ales 22@... 3@... 1&@... 2@...
Gffi!e 1*@... 2@... *@... H
F11$@... F14@... F,4@... F24@...
)ssume t'e follo0ing payroll tax ratesA
F.1.%.). for employer and employee (L ea!'
Dnemployment 3L
?'at amount s'ould Puir+ a!!rue as its s'are of payroll taxes in its G!tober 31@ 2..(
balan!e s'eetE
a. F21@3...
b. F14@(2..
!. F13@**..
d. F(@3...
13 - /3
1.&. Dexter %o. sells ma:or 'ouse'old applian!e servi!e !ontra!ts for !as'. T'e servi!e
!ontra!ts are for a one-year@ t0o-year@ or t'ree-year period. %as' re!eipts from !ontra!ts
are !redited to unearned servi!e !ontra!t revenues. T'is a!!ount 'ad a balan!e of
F4*.@... at De!ember 31@ 2..& before year-end ad:ustment. -ervi!e !ontra!t !osts are
!'arged as in!urred to t'e servi!e !ontra!t expense a!!ount@ 0'i!' 'ad a balan!e of
F12.@... at De!ember 31@ 2..&. Gutstanding servi!e !ontra!ts at De!ember 31@ 2..&
expire as follo0sA
During 2..( During 2..* During 2..,
F1..@... F1&.@... F(.@...
?'at amount s'ould be reported as unearned servi!e !ontra!t revenues in Dexter4s
De!ember 31@ 2..& balan!e s'eetE
a. F3&.@....
b. F33.@....
!. F24.@....
d. F22.@....
1.(. Dtley Trading -tamp %o. re!ords stamp servi!e revenue and provides for t'e !ost of
redemptions in t'e year stamps are sold to li!ensees. Dtley4s past experien!e indi!ates
t'at only *.L of t'e stamps sold to li!ensees 0ill be redeemed. Dtley4s liability for stamp
redemptions 0as F(@$..@... at De!ember 31@ 2..$. )dditional information for 2..& is as
follo0sA
-tamp servi!e revenue from stamps sold to li!ensees F$@...@...
%ost of redemptions 3@4..@...
1f all t'e stamps sold in 2..& 0ere presented for redemption in 2..(@ t'e redemption !ost
0ould be F2@$..@.... ?'at amount s'ould Dtley report as a liability for stamp redemptions
at De!ember 31@ 2..&E
a. F,@1..@....
b. F&@&..@....
!. F&@1..@....
d. F4@1..@....
1.*. 5ett %o. 'as a probable loss t'at !an only be reasonably estimated 0it'in a range of
out!omes. "o single amount 0it'in t'e range is a better estimate t'an any ot'er amount.
T'e loss a!!rual s'ould be
a. /ero.
b. t'e maximum of t'e range.
!. t'e mean of t'e range.
d. t'e minimum of t'e range.
1.,. During 2..&@ 2lass %o. introdu!ed a ne0 produ!t !arrying a t0o-year 0arranty against
defe!ts. T'e estimated 0arranty !osts related to dollar sales are 2L 0it'in 12 mont's
follo0ing sale and 4L in t'e se!ond 12 mont's follo0ing sale. -ales and a!tual 0arranty
expenditures for t'e years ended De!ember 31@ 2..& and 2..( are as follo0sA
)!tual ?arranty
-ales Expenditures
2..& F *..@... F12@...
2..( 1@...@... 3.@...
F1@*..@... F42@...
)t De!ember 31@ 2..(@ 2lass s'ould report an estimated 0arranty liability of
13 - /9
a. F..
b. F1.@....
!. F3.@....
d. F&&@....
11.. 1n 7ar!' 2..(@ an explosion o!!urred at No0e %o.4s plant@ !ausing damage to area
properties. 2y 7ay 2..(@ no !laims 'ad yet been asserted against No0e. No0ever@
No0e4s management and legal !ounsel !on!luded t'at it 0as reasonably possible t'at
No0e 0ould be 'eld responsible for negligen!e@ and t'at F4@...@... 0ould be a
reasonable estimate of t'e damages. No0e4s F$@...@... !ompre'ensive publi! liability
poli!y !ontains a F4..@... dedu!tible !lause. 1n No0e4s De!ember 31@ 2..& finan!ial
statements@ for 0'i!' t'e auditor4s field0or+ 0as !ompleted in )pril 2..(@ 'o0 s'ould t'is
!asualty be reportedE
a. )s a note dis!losing a possible liability of F4@...@....
b. )s an a!!rued liability of F4..@....
!. )s a note dis!losing a possible liability of F4..@....
d. "o note dis!losure of a!!rual is re8uired for 2..& be!ause t'e event o!!urred in 2..(.
%ult$ple C,o$ce An!e"CPA A)apte)
Ite( An# Ite( An# Ite( An# Ite( An# Ite( An# Ite( An#
1... a 1.2. ! 1.4. a 1.&. b 1.*. d 11.. !
1.1. b 1.3. d 1.$. d 1.(. ! 1.,. d
DERI2ATIONS Co(putat$onal
No# An!e" De"$8at$on
&3. b F1$2@2.$ Q F1$.@... B F2@2.$.
F2@2.$ R 2;3 B F1@4(..
&4. d F3.@... S <F3..@... Q F3.@...= B ..1111 B 11.11L.
&$. b F1@$..@....
&&. d F2@...@... Q F1@2..@... B F*..@....
&(. b - T ..&- B F14*@4..@ - B F14.@....
F14*@4.. Q F14.@... B F*@4...
&*. b F*@4.. R .,* B F*@232.
&,. ! ..$- R .,( B F*1@4*.@ - B F1@&*.@....
(.. a ($@... R F2. B F1@$..@....
(1. a &.@... R F2. B F1@2..@....
(2. d U<..&2 Q ..$4= T ..2V R F$..@... B F14@....
13 - /:
DERI2ATIONS Co(putat$onal -cont#.
(3. d U<..&2 Q ..$4= T ..2V R F4..@... B F11@2...
(4. ! $. R 12 R * R F14 B F&(@2..I $. R 1$ R * R F1& B F,&@....
($. ! $. R 12 R * R F1(.$. B F*4@...I $. R 1$ R * R F2. B F12.@....
(&. ! <F2(.@... R (.&$L= T <F,.@... R 1.4$L= T <F&.@... R 1.*L= B F23@.4..
((. d F2$.*. R * R 1. R 3$ B F(2@24..
(*. a <F2*.$. R * R 1. R 3$= T <F2(... R * R 2 R 3$= B F,4@,2..
(,. b 4@...@... R .1. R F1 B F4..@...I F4..@... Q F14.@... B F2&.@....
*.. d <F1....@... T F((@11.= S 1. B F1.(@(1.I F((@11. R .1. B F(@(11.
*1. a
*2. b &@...@... R .1. R F1 B F&..@...I F&..@... Q F21.@... B F3,.@....
*3. d <F2@...@... T F1$4@22.= S 1. B F21$@42.I F1$4@22. R .1. B F1$@422.
*4. d <F4@2..@... R .12= Q F1*,@... B F31$@....
*$. b WU<&($@... R .&.= Q 33.@...V S 3X R F1.$. B F3(@$...
*&. d <F2@*..@... .12= Q F12&@... B F21.@....
*(. b WU<$..@... R .&.= Q 22.@...V S 4X R F1.$. B F3.@....
**. d U<$..@... R .4= S *V R F2 B F$.@....
*,. d U<2..@... Q 12.@...= S *V R F2 B F2.@....
,.. d WU<&..@... R .4= Q 1$.@...V S *X R F2 B F22@$...
F22@$.. T F2.@... B F42@$...
,1. b F3@&..@... and F2@4..@....
,2. d F1@$..@... R ..4 B F&.@....
,3. a U<F3..@... T F4..@...= R ..(V Q F3.@... B F1,@....
,4. d F.@ gain !ontingen!ies are not a!!rued.
,$. b <F$4.@... R .$= Q F22$@... B F4$@....
13 - /<
DERI2ATIONS Co(putat$onal -cont#.
F4@... T F($@... T F&1@...
,&. ! HHHHHHHHHHHHH B 1.1( to 1.
F12.@...
6,(. ! 2 B WF&..@... Q U<F&..@... Q 2= R .3VX R ..$
2 B F21@32..
6,*. ! 2 B ..$ WF*..@... Q 2 Q U<F*..@... Q 2= R .3VX
2 B F2(@.$3.
6,,. b 2 B .2. U<F1@2..@... Q F3..@...= Q 2V
2 B F1$.@....
DERI2ATIONS CPA A)apte)
1... a %on!eptualHa!!ounts payable generally are /ero-interest-bearing and
unse!ured.
1.1. b F*.@... and F1&.@....
4
1.2. ! F*..@... R .12 R H B F32@....
12
1.3. d %on!eptualHbot' notes 'ave been refinan!ed by long-term obligations.
1.4. a F&$.@... T F&$@... Q F&2$@... B F,.@....
1.$. d <F,4@... R ..(= T <F24@... R ..3= B F(@3...
1.&. b F1..@... T F1&.@... T F(.@... B F33.@....
1.(. ! <F2@$..@... R .*= T F(@$..@... Q F3@4..@... B F&@1..@....
1.*. d %on!eptual.
1.,. d <F1@*..@... R ..&= Q F42@... B F&&@....
11.. ! %on!eptual.
13 - /=
E0ERCISES
E@# 13-111H"otes payable.
Gn )ugust 31@ 9rant %o. partially refunded F1*.@... of its outstanding 1.L note payable made
one year ago to )rma -tate 2an+ by paying F1*.@... plus F1*@... interest@ 'aving obtained t'e
F1,*@... by using F$2@4.. !as' and signing a ne0 one-year F1&.@... note dis!ounted at ,L by
t'e ban+.
Int"uct$on
<1= 7a+e t'e entry to re!ord t'e partial refunding. )ssume 9rant %o. ma+es reversing entries
0'en appropriate.
<2= #repare t'e ad:usting entry at De!ember 31@ assuming straig't-line amorti/ation of t'e
dis!ount.
Solut$on 13-111
<1= "otes #ayable........................................................................... 1*.@...
1nterest Expense........................................................................ 1*@...
Dis!ount on "otes #ayable <,L R F1&.@...=............................ 14@4..
"otes #ayable................................................................ 1&.@...
%as'.............................................................................. $2@4..
<2= 1nterest Expense <1;3 R F14@4..=.............................................. 4@*..
Dis!ount on "otes #ayable............................................ 4@*..
E@# 13-11/H#ayroll entries.
Total payroll of T'ames %o. 0as F,2.@...@ of 0'i!' F1&.@... represented amounts paid in
ex!ess of F,.@... to !ertain employees. T'e amount paid to employees in ex!ess of F(@... 0as
F(2.@.... 1n!ome taxes 0it''eld 0ere F22$@.... T'e state unemployment tax is 1.2L@ t'e
federal unemployment tax is .*L@ and t'e F.1.%.). tax is (.&$L on an employeeCs 0ages to
F,.@... and 1.4$L in ex!ess of F,.@....
Int"uct$on
<a= #repare t'e :ournal entry for t'e 0ages and salaries paid.
<b= #repare t'e entry to re!ord t'e employer payroll taxes.
Solut$on 13-11/
<a= ?ages and -alaries Expense.................................................... ,2.@...
?it''olding Taxes #ayable............................................ 22$@...
F1%) Taxes #ayable....................................................... &.@4&.6
%as'.............................................................................. &34@$4.
6 U<F,2.@... Q F1&.@...= R (.&$LV T <F1&.@... R 1.4$L=
13 - />
Solut$on 13-11/ <!ont.=
<b= #ayroll Tax Expense ................................................................ &4@4&.
F1%) Taxes #ayable
<F(&.@... R (.&$L= T <F1&.@... R 1.4$L=.............. &.@4&.
Federal Dnemployment Tax #ayable
U<F,2.@... Q F(2.@...= R .*LV ................................ 1@&..
-tate Dnemployment Tax #ayable <F2..@... R 1.2L= . . 2@4..
E@# 13-113H%ompensated absen!es.
?olff %o. began operations on Manuary 2@ 2..&. 1t employs 1$ people 0'o 0or+ *-'our days. Ea!'
employee earns 1. paid va!ation days annually. 3a!ation days may be ta+en after Manuary 1. of
t'e year follo0ing t'e year in 0'i!' t'ey are earned. T'e average 'ourly 0age rate 0as F24... in
2..& and F2$.$. in 2..(. T'e average va!ation days used by ea!' employee in 2..( 0as ,. ?olff
%o. a!!rues t'e !ost of !ompensated absen!es at rates of pay in effe!t 0'en earned.
Int"uct$on
#repare :ournal entries to re!ord t'e transa!tions related to paid va!ation days during 2..& and
2..(.
Solut$on 13-113
2..& ?ages Expense................................................................... 2*@*.. <1=
3a!ation ?ages #ayable.......................................... 2*@*..
<1= 1$ R * R F24... B F2@**.I F2@**. R 1. B F2*@*...
2..( ?ages Expense................................................................... 1@&2.
3a!ation ?ages #ayable..................................................... 2$@,2. <2=
%as'......................................................................... 2(@$4. <3=
?ages Expense................................................................... 3.@&.. <4=
3a!ation ?ages #ayable.......................................... 3.@&..
<2= F2@**. R , B F2$@,2..
<3= 1$ * F2$.$. B F3@.&.I F3@.&. , B F2(@$4..
<4= F3@.&. 1. B F3.@&...
E@# 13-113H%ontingent liabilities.
2elo0 are t'ree independent situations.
1. 1n )ugust@ 2..( a 0or+er 0as in:ured in t'e fa!tory in an a!!ident partially t'e result of 'is
o0n negligen!e. T'e 0or+er 'as sued ooney %o. for F*..@.... %ounsel believes it is
reasonably possible t'at t'e out!ome of t'e suit 0ill be unfavorable and t'at t'e settlement
0ould !ost t'e !ompany from F2$.@... to F$..@....
13 - 3?
E@# 13-113 <!ont.=
2. ) suit for brea!' of !ontra!t see+ing damages of F2@4..@... 0as filed by an aut'or against
Early %o. on G!tober 4@ 2..(. Early4s legal !ounsel believes t'at an unfavorable out!ome is
probable. ) reasonable estimate of t'e a0ard to t'e plaintiff is bet0een F&..@... and
F1@*..@.... "o amount 0it'in t'is range is a better estimate of potential damages t'an any
ot'er amount.
3. #eete is involved in a pending !ourt !ase. #eeteCs la0yers believe it is probable t'at #eete
0ill be a0arded damages of F1@...@....
Int"uct$on
Dis!uss t'e proper a!!ounting treatment@ in!luding any re8uired dis!losures@ for ea!' situation.
9ive t'e rationale for your ans0ers.
Solut$on 13-113
1. ooney %o. s'ould dis!lose in t'e notes to t'e finan!ial statements t'e existen!e of a
possible !ontingent liability related to t'e la0 suit. T'e note s'ould indi!ate t'e range of t'e
possible loss. T'e !ontingent liability s'ould not be a!!rued be!ause t'e loss is not
probable.
2. T'e probable a0ard s'ould be a!!rued by a !'arge to an estimated loss and a !redit to an
estimated liability of F&..@.... Early %o. s'ould dis!lose t'e follo0ing in t'e notes to t'e
finan!ial statementsA t'e amount of t'e suit@ t'e nature of t'e !ontingen!y@ t'e reason for t'e
a!!rual@ and t'e range of t'e possible loss.
T'e a!!rual is made be!ause it is probable t'at a liability 'as been in!urred and t'e amount
of t'e loss !an be reasonably estimated. T'e lo0est amount of t'e range of possible losses
is used 0'en no amount is a better estimate t'an any ot'er amount.
3. #eete s'ould not re!ord t'e gain !ontingen!y until itCs reali/ed. Dsually@ gain !ontingen!ies
are neit'er a!!rued nor dis!losed. T'e F1@...@... gain !ontingen!y s'ould be dis!losed
only if t'e probability t'at it 0ill be reali/ed is very 'ig'.
E@# 13-119H#remiums.
Farley 7usi! -'op gives its !ustomers !oupons redeemable for a poster plus a Dixie %'i!+s %D.
Gne !oupon is issued for ea!' dollar of sales. Gn t'e surrender of 1.. !oupons and F$... !as'@
t'e poster and %D are given to t'e !ustomer. 1t is estimated t'at *.L of t'e !oupons 0ill be
presented for redemption. -ales for t'e first period 0ere F(..@...@ and t'e !oupons redeemed
totaled 34.@.... -ales for t'e se!ond period 0ere F*4.@...@ and t'e !oupons redeemed totaled
*$.@.... Farley 7usi! -'op boug't 2.@... posters at F2...;poster and 2.@... %Ds at F&...;%D.
Int"uct$on
#repare t'e follo0ing entries for t'e t0o periods@ assuming all t'e !oupons expe!ted to be
redeemed from t'e first period 0ere redeemed by t'e end of t'e se!ond period.
13 - 31
E@# 13-119 <!ont.=
Entry #eriod 1 #eriod 2
<a= To re!ord !oupons redeemed
HHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH
<b= To re!ord estimated liability
Solut$on 13-119
Entry #eriod 1 #eriod 2
<a= Estimated 5iability for #remiums &@&..
#remium Expense U<34.@... S 1..= R <F*... Q F$=V 1.@2.. 1*@,..
%as' <34.@... S 1..= R F$ 1(@... 42@$..
1nventory of #remium #osters and %Ds 2(@2.. &*@...
<b= #remium Expense &@&..6 1@2&.
Estimated 5iability for #remiums &@&.. 1@2&.
6U<(..@... R .*.= Q 34.@...V S 1.. R F3...
E@# 13-1:H#remiums.
2ar+ley %o. in!ludes one !oupon in ea!' bag of dog food it sells. 1n return for 4 !oupons@
!ustomers re!eive a dog toy t'at t'e !ompany pur!'ases for F1.2. ea!'. 2ar+ley4s experien!e
indi!ates t'at &. per!ent of t'e !oupons 0ill be redeemed. During 2..&@ 1..@... bags of dog
food 0ere sold@ 12@... toys 0ere pur!'ased@ and 4.@... !oupons 0ere redeemed. During 2..(@
12.@... bags of dog food 0ere sold@ 1&@... toys 0ere pur!'ased@ and &.@... !oupons 0ere
redeemed.
Int"uct$on
Determine t'e premium expense to be reported in t'e in!ome statement and t'e estimated
liability for premiums on t'e balan!e s'eet for 2..& and 2..(.
Solut$on 13-11:
2..& 2..(
#remium expense F1*@... <1= F21@&.. <3=
Estimated liability for premiums &@... <2= ,@&.. <4=
<1= 1..@... R .& B &.@...I &.@... S 4 B 1$@...I 1$@... R F1.2. B F1*@....
<2= 4.@... S 4 B 1.@...I 1$@... Q 1.@... B $@...I $@... R F1.2. B F&@....
<3= 12.@... R .& B (2@...I (2@... S 4 B 1*@...I 1*@... R F1.2. B F21@&...
<4= &.@... S 4 B 1$@...I $@... T 1*@... Q 1$@... B *@...I *@... R F1.2. B F,@&...
13 - 3/
;E@# 13-11<H2onus !al!ulation.
?ilson %o. 'as an agreement 0it' t'e sales manager t'at s'e is to re!eive a bonus of $L of net
in!ome after dedu!tion of t'e bonus and in!ome taxes. %ompany in!ome before dedu!tion of t'e
bonus and in!ome taxes is F2..@.... 1n!ome taxes are 3.L and t'e bonus is dedu!tible for
taxes.
Int"uct$on
<a= -'o0 your !al!ulation of t'e amount of t'e bonus to t'e nearest dollar.
<b= -'o0 your !al!ulation of t'e amount of t'e taxes to t'e nearest dollar.
;Solut$on 13-11<
<a= 2 B ..$UF2..@... Q 2 Q .3.<F2..@... Q 2=V
2 B ..$UF2..@... Q 2 Q F&.@... T .32V
2 B ..$UF14.@... Q .(2V
2 B F(@... Q ..3$2
1..3$2 B F(@...
2 B F&@(&3
<b= T B .3. <F2..@... Q F&@(&3=
T B .3. <F1,3@23(=
T B F$(@,(1
PROBLE%S
P"# 13-11=H)!!ounts and "otes #ayable.
Des!ribed belo0 are !ertain transa!tions of %arson %ompany for 2..(A
1. Gn 7ay 1.@ t'e !ompany pur!'ased goods from May %ompany for F$.@...@ terms 2;1.@
n;3.. #ur!'ases and a!!ounts payable are re!orded at net amounts. T'e invoi!e 0as paid
on 7ay 1*.
2. Gn Mune 1@ t'e !ompany pur!'ased e8uipment for F&.@... from "olan %ompany@ paying
F2.@... in !as' and giving a one-year@ ,L note for t'e balan!e.
3. Gn -eptember 3.@ t'e !ompany dis!ounted at 1.L its F12.@...@ one-year /ero-interest-
bearing note at First -tate 2an+.
Int"uct$on
<a= #repare t'e :ournal entries ne!essary to re!ord t'e transa!tions above using appropriate
dates.
<b= #repare t'e ad:usting entries ne!essary at De!ember 31@ 2..( in order to properly report
interest expense related to t'e above transa!tions. )ssume straig't-line amorti/ation of
dis!ounts.
<!= 1ndi!ate t'e manner in 0'i!' t'e above transa!tions s'ould be refle!ted in t'e %urrent
5iabilities se!tion of %arson %ompany4s De!ember 31@ 2..( balan!e s'eet.
13 - 33
Solut$on 13-11=
<a= 7ay 1.@ 2..(
#ur!'ases;1nventory.................................................................. 4,@...
)!!ounts #ayable.......................................................... 4,@...
7ay 1*@ 2..(
)!!ounts #ayable...................................................................... 4,@...
%as'.............................................................................. 4,@...
Mune 1@ 2..(
E8uipment................................................................................. &.@...
%as'.............................................................................. 2.@...
"otes #ayable................................................................ 4.@...
-eptember 3.@ 2..(
%as'.......................................................................................... 1.*@...
Dis!ount on "otes #ayable....................................................... 12@...
"otes #ayable................................................................ 12.@...
<b= 1nterest Expense........................................................................ 2@1..
1nterest #ayable <F4.@... R .., R (;12=......................... 2@1..
1nterest Expense........................................................................ 3@...
Dis!ount on "otes #ayable <F12@... R 3;12=................. 3@...
<!= %urrent 5iabilities
1nterest payable F 2@1..
"ote payableH"olan %ompany 4.@...
"ote payableHFirst -tate 2an+ F12.@...
5essA Dis!ount on note ,@... 111@...
F1$3@1..
P"# 13-11>Hefinan!ing of s'ort-term debt.
)t t'e finan!ial statement date of De!ember 31@ 2..&@ t'e liabilities outstanding of 7anning
%orporation in!luded t'e follo0ingA
1. %as' dividends on !ommon sto!+@ F&.@...@ payable on Manuary 1$@ 2..(.
2. "ote payable to )dmire -tate 2an+@ F4(.@...@ due Manuary 2.@ 2..(.
3. -erial bonds@ F1@...@...@ of 0'i!' F2$.@... mature during 2..(.
4. "ote payable to T'ird "ational 2an+@ F3..@...@ due Manuary 2(@ 2..(.
T'e follo0ing transa!tions o!!urred early in 2..(A
Manuary 1$A T'e !as' dividends on !ommon sto!+ 0ere paid.
Manuary 2.A T'e note payable to )dmire -tate 2an+ 0as paid.
Manuary 2$A T'e !orporation entered into a finan!ing agreement 0it' )dmire -tate 2an+@
enabling it to borro0 up to F$..@... at any time t'roug' t'e end of 2..,.
)mounts borro0ed under t'e agreement 0ould bear interest at 1L above t'e
ban+4s prime rate and 0ould mature 3 years from t'e date of t'e loan. T'e
!orporation immediately borro0ed F4..@... to repla!e t'e !as' used in paying its
Manuary 2. note to t'e ban+.
13 - 33
P"# 13-11> <!ont.=.
Manuary 2&A 4.@... s'ares of !ommon sto!+ 0ere issued for F3$.@.... F3..@... of t'e
pro!eeds 0as used to li8uidate t'e note payable to T'ird "ational 2an+.
February 1A T'e finan!ial statements for 2..& 0ere issued.
Int"uct$on
#repare a partial balan!e s'eet for 7anning %orporation@ s'o0ing t'e manner in 0'i!' t'e above
liabilities s'ould be presented at De!ember 31@ 2..&. T'e liabilities s'ould be properly !lassified
bet0een !urrent and long-term@ and appropriate note dis!losure s'ould be in!luded.
Solut$on 13-11>
%urrent liabilitiesA
Dividends payable on !ommon sto!+ F &.@...
"otes payableH )dmire -tate 2an+ 4(.@...
%urrently maturing portion of serial bonds 2$.@...
Total !urrent liabilities F (*.@...
5ong-term debtA
"ote payableHT'ird "ational 2an+@ refinan!ed in
Manuary@ 2..(H"ote 1 3..@...
-erial bonds not maturing !urrently ($.@...
Total long-term debt 1@.$.@...
Total liabilities F1@*3.@...
"ote 1A Gn Manuary 2&@ 2..(@ t'e !orporation issued 4.@... s'ares of !ommon sto!+ and
re!eived pro!eeds totaling F3$.@...@ of 0'i!' F3..@... 0as used to li8uidate a note payable t'at
matured on Manuary 2(@ 2..(. )!!ordingly@ su!' note payable 'as been !lassified as long-term
debt at De!ember 31@ 2..&.
P"# 13-1/?H#remiums.
Tangy %andy %ompany offers a !offee mug as a premium for every ten $.-!ent !andy bar
0rappers presented by !ustomers toget'er 0it' F1.... T'e pur!'ase pri!e of ea!' mug to t'e
!ompany is ,. !entsI in addition it !osts &. !ents to mail ea!' mug. T'e results of t'e premium
plan for t'e years 2..& and 2..( are as follo0s <assume all pur!'ases and sales are for !as'=A
2..& 2..(
%offee mugs pur!'ased (2.@... *..@...
%andy bars sold $@&..@... &@($.@...
?rappers redeemed 2@*..@... 4@2..@...
2..& 0rappers expe!ted to be redeemed in 2..( 2@...@...
2..( 0rappers expe!ted to be redeemed in 2..* 2@(..@...
Int"uct$on
<a= #repare t'e general :ournal entries t'at s'ould be made in 2..& and 2..( related to t'e
above plan by Tangy %andy.
<b= 1ndi!ate t'e a!!ount names@ amounts@ and !lassifi!ations of t'e items related to t'e premium
plan t'at 0ould appear on t'e Tangy %andy %ompany balan!e s'eet and in!ome statement
at t'e end of 2..& and 2..(.
13 - 39
Solut$on 13-1/?
<a= 2..&
1nventory of #remium 7ugs............................................................. &4*@...
%as'.................................................................................... &4*@...
<(2.@... R F.,. B F*&4@...=
%as'................................................................................................ 2@*..@...
-ales.................................................................................... 2@*..@...
<$@&..@... R F.$. B F2@*..@...=
%as'................................................................................................ 112@...
#remium Expense........................................................................... 14.@...
1nventory of #remium 7ugs................................................. 2$2@...
U2@*..@... S 1. B 2*.@... R <F1... Q F.&.= B F112@...
2*.@... R F.,. B F2$2@...V
#remium Expense........................................................................... 1..@...
Estimated 5iability for #remiums.......................................... 1..@...
<2@...@... S 1. B 2..@... R F.$. B F1..@...=
2..(
1nventory of #remium 7ugs............................................................. (2.@...
%as' ................................................................................... (2.@...
<*..@... R F.,. B F(2.@...=
%as'................................................................................................ 3@3($@...
-ales.................................................................................... 3@3($@...
<&@($.@... R F.$. B F3@3($@...=
%as'................................................................................................ 1&*@...
Estimated 5iability for #remiums .................................................... 1..@...
#remium Expense........................................................................... 11.@...
1nventory of #remium 7ugs ................................................ 3(*@...
U4@2..@... S 1. B 42.@... R <F1... Q F.&.= B F1&*@...
42.@... R F.,. B F3(*@...V
#remium Expense........................................................................... 13$@...
Estimated 5iability for #remiums.......................................... 13$@...
<2@(..@... S 1. B 2(.@... R F.$. B F13$@...=
<b= 2alan!e -'eet
"ame %lass 2..& 2..(
1nventory of #remium 7ugs %urrent )sset F3,&@... F(3*@...
Estimated 5iability for #remiums %urrent 5iability 1..@... 13$@...
1n!ome -tatement
"ame %lass 2..& 2..(
#remium Expense Gperating Expense F24.@... F24$@...
13 - 3:
P"# 13-1/1H?arranties.
Mames E8uipment %ompany sells !omputers for F1@$.. ea!' and also gives ea!' !ustomer a 2-
year 0arranty t'at re8uires t'e !ompany to perform periodi! servi!es and to repla!e defe!tive
parts. During 2..&@ t'e !ompany sold (.. !omputers. 2ased on past experien!e@ t'e !ompany
'as estimated t'e total 2-year 0arranty !osts as F3. for parts and F&. for labor. <)ssume sales
all o!!ur at De!ember 31@ 2..&.=
1n 2..(@ Mames in!urred a!tual 0arranty !osts relative to 2..& !omputer sales of F1.@... for
parts and F1*@... for labor.
Int"uct$on
<a= Dnder t'e expense warranty treatment@ give t'e entries to refle!t t'e above transa!tions
<a!!rual met'od= for 2..& and 2..(.
<b= Dnder t'e cash basis met'od@ 0'at are t'e ?arranty Expense balan!es for 2..& and 2..(E
<!= T'e transa!tions of part <a= !reate 0'at balan!e under !urrent liabilities in t'e 2..& balan!e
s'eetE
Solut$on 13-1/1
<a= 2..&
)!!ounts e!eivable....................................................................... 1@.$.@...
-ales.................................................................................... 1@.$.@...
?arranty Expense........................................................................... &3@...
Estimated 5iability Dnder ?arranties................................... &3@...
2..(
Estimated 5iability Dnder ?arranties............................................... 2*@...
1nventory.............................................................................. 1.@...
)!!rued #ayroll.................................................................... 1*@...
<b= 2..& F..
2..( F2*@....
<!= 2..& %urrent 5iabilitiesHEstimated 5iability Dnder ?arranties F31@$...
<T'e remainder of t'e F&3@... liability is a long-term liability.=
13 - 3<

Ch13 Current Liabilities and Contingencies

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CHAPTER 13

CURRENT LIABILITIES AND CONTINGENCIES

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