Intermediate Accounting Donald E.- Kieso 15th Edition Test Bank

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Intermediate Accounting Donald E.- Kieso 15th Edition Test Bank

Description

CHAPTER 13

CURRENT LIABILITIES AND CONTINGENCIES

IFRS questions are available at the end of this chapter.

TRUE-FALSEConceptual
Answer No. Description
F 1. Zero-interest-bearing note payable.
F 2. Dividends in arrears.
T 3. Examples of unearned revenues.
T 4. Reporting discount on Notes Payable.
T 5. Currently maturing long-term debt.
T 6. Excluding short-term debt refinanced.
T 7. Accounting for sales tax collected.
F 8. Accounting for sick pay.
T 9. Social security taxes as liabilities.
F 10. Definition of accumulation rights.
T 11. Recognizing compensated absences expense.
F 12. Accruing estimated loss contingency.
T 13. Disclosing gain contingencies.
F 14. Sales-type warranty profit.
T 15. Fair value of asset retirement obligation.
T 16. Reporting a litigation liability.
F 17. Expense warranty approach.
F 18. Acid-test ratio components.
F 19. Affect on current ratio.
T 20. Reporting current liabilities.

MULTIPLE CHOICEConceptual
Answer No. Description
d 21. Definition of a liability.
d 22. Nature of current liabilities.
a 23. Recording of accounts payable.
a 24. Classification of notes payable.
b 25. Classification of discounts on notes payable.
d 26. Identify current liability.
c 27. Bonds reported as current liability.
d 28. Identify item which is not a current liability.
c 29. Dividends reported as current liability.
d 30. Classification of stock dividends distributable.
c 31. Identify item which is not a current liability.
d 32. Identify current liability.
c 33. Characteristic of current liability.
d 34. Definition of a liability.
b 35. Importance of liability section of balance sheet.
a 36. Current liabilities and operating cycle.

MULTIPLE CHOICEConceptual (cont.)
Answer No. Description

a 37. Present value and concept of a liability.
c 38. Zero-interest-bearing notes payable.
d 39. Callable debt reporting.
d 40. Condition to exclude short-term obligation.
a 41. Ability to consummate refinancing of short-term debt.
b 42. Disclosure of preferred dividends not declared.
c 43. Example of unearned revenue.
d 44. Short-term obligations expected to be refinanced.
d 45. Ability to consummate refinancing of short-term obligations.
d 46. Determine what is a liability.
a 47. Classification of sales taxes.
d S48. Disclosure for short-term debt refinanced.
b S49. Vested rights vs. accumulated rights.
d P50. Deductions in computing net pay.
d 51. Employers payroll tax expense.
d 52. Accrual of a liability for compensated absences.
c 53. Accrual of a liability for compensated absences.
d 54. Accrual of a liability for compensated absences.
d 55. Compensated absences.
d 56. Requirements for compensated absences accrual.
b 57. Condition for sick pay accrual.
c 58. Payroll tax deduction.
d 59. Definition of a contingency.
b 60. Recording contingent liability.
a 61. Example of contingent liability.
d 62. Recording contingent liability.
d 63. Disclosure of a gain contingency.
d 64. Disclosure of contingencies.
b 65. Accrual of loss contingency.
a 66. Litigation and loss contingencies.
c 67. Accrual of a contingent liability.
d 68. Source of a contingent liability.
b 69. Asset retirement obligation.
c 70. Asset retirement obligation.
c 71. Classification of warranty liability.
c 72. Liability accrual due to governmental action.
a 73. Accrual of product warranties.
b P74. Determining loss amount to report.
d S75. Reporting lawsuit loss and liability.
d S76. Accrual method for warranty costs.
c 77. Accrual warranty method.
d 78. Cash-basis warranty method.
a 79. Characteristic of expense warranty approach.
b 80. Accounting for discount coupon.
a 81. Condition to recognize asset retirement obligation.
b 82. Recording liability for pending litigation.
d 83. Computation of acid-test ratio.
c 84. Current ratio information.

MULTIPLE CHOICEConceptual (cont.)
Answer No. Description

c S85. Presentation of current liabilities.
a P86. Current ratio formula.
d 87. Disclosure of accrued liabilities.
d 88. Acid-test ratio elements.
d 89. Items included in current ratio and acid-test ratio.

P These questions also appear in the Problem-Solving Survival Guide.
S These questions also appear in the Study Guide.

MULTIPLE CHOICEComputational
Answer No. Description
b 90. Adjusting entry involving discount on short-term note payable.
d 91. Calculate effective interest on discounted note.
a 92. Calculate cost of inventory purchase.
d 93. Calculate interest expense.
b 94. Calculate the amount of note payable and interest expense.
c 95. Reporting 5-year note in financial statements.
b 96. Calculate unearned revenue.
d 97. Calculate amount of sales tax payable.
b 98. Determine amount of short-term debt to be reported.
d 99. Determine amount of short-term debt to be reported.
b 100. Calculate sales taxes for the month.
b 101. Calculate amount of sales taxes payable.
c 102. Determine amount of sales subject to sales tax.
a 103. Short-term debt to be excluded.
a 104. Short-term debt to be excluded.
d 105. Federal/state unemployment taxes.
d 106. Federal/state unemployment taxes.
c 107. Vacation liability accrual.
c 108. Vacation liability accrual.
c 109. Calculate payroll tax expense.
d 110. Calculation of vacation expense to be recognized.
a 111. Calculation of accrued liability to be recognized for compensated balances.
d 112. Effect of payroll taxes on assets / liabilities.
a 113. Record vacation liability accrual.
b 114. Record loss contingency amount.
d 115. Record asset retirement obligation.
d 116. Calculate extended warranty contract profit.
c 117. Calculate warranty liability.
b 118. Calculate rebate expense and liability.
d 119. Asset retirement obligation.
a 120. Calculate insurance expense and loss.
b 121. Calculate rebate expense and liability.
d 122. Asset retirement obligation.
d 123. Calculate warranty liability.

MULTIPLE CHOICEComputational (cont.)
Answer No. Description
b 124. Calculate liability for premiums.
d 125. Calculate warranty liability.
b 126. Calculate liability for premiums.
d 127. Determine premiums expense for the year.
d 128. Calculate estimated liability for premiums.
d 129. Calculate estimated liability for premiums.
b 130. Determine amount to accrue as a loss contingency.
d 131. Accrue warranty expense for the year.
a 132. Calculate warranty liability.
d 133. Determine amount to accrue as a gain contingency.
b 134. Calculate liability for unredeemed coupons.
c 135. Calculate the quick (acid-test) ratio.

MULTIPLE CHOICECPA Adapted
Answer No. Description
a 136. Knowledge of accounts payable.
b 137. Determine current and long-term portions of debt.
c 138. Determine accrued interest payable.
d 139. Determine amount of short-term debt to be reported.
a 140. Calculate accrued salaries payable.
d 141. Accrual of payroll taxes.
b 142. Calculate unearned service contract revenue.
c 143. Determine liability from unredeemed trading stamps.
d 144. Determine range of loss accrual.
d 145. Calculate the estimated warranty liability.
c 146. Disclosure of a casualty claim.

BRIEF EXERCISES
Item Description
BE13-147 Notes payable.
BE13-148 Payroll entries.

EXERCISES
Item Description
E13-149 Compensated absences.
E13-150 Contingent liabilities.
E13-151 Premiums.
E13-152 Premiums.

PROBLEMS
Item Description
P13-153 Accounts and notes payable.
P13-154 Refinancing of short-term debt.
P13-155 Premiums.
P13-156 Warranties.

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. Identify the criteria used to account for and disclose gain and loss contingencies.

5. Explain the accounting for different types of loss contingencies.

6. Indicate how to present and analyze liabilities and contingencies.

7. Compare the accounting procedures for current liabilities and contingencies under GAAP and IFRS.

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Learning Objective 1
1. TF 22. MC 27. MC 32. MC 37. MC 92. MC 138. MC
2. TF 23. MC 28. MC 33. MC 38. MC 93. MC 147. BE
3. TF 24. MC 29. MC 34. MC 39. MC 94. MC 153. P
4. TF 25. MC 30. MC 35. MC 90. MC 136. MC
21. MC 26. MC 31. MC 36. MC 91. MC 137. MC
Learning Objective 2
5. TF 41. MC 45. MC 95. MC 99. MC 103. MC
6. TF 42. MC 46. MC 96. MC 100. MC 104. MC
7. TF 43. MC 47. MC 97. MC 101. MC 139. MC
40. MC 44. MC S48. MC 98. MC 102. MC 154. P
Learning Objective 3
8. TF 46. MC 52. MC 56. MC 106. MC 110. MC 140. MC
9. TF S49. MC 53. MC 57. MC 107. MC 111. MC 141. MC
10. TF P50. MC 54. MC 58. MC 108. MC 112. MC 148. BE
11. TF 51. MC 55. MC 105. MC 109. MC 113. MC 149. E
Learning Objective 4
12. TF 59. MC 62. MC 65. MC 68. MC 150. E- CT
13. TF 60. MC 63. MC 66. MC 130. MC
46. MC 61. MC 64. MC 67. MC 133. MC
Learning Objective 5
14. TF 72. MC 79. MC 117. MC 124. MC 132. MC 151. E
15. TF 73. MC 80. MC 118. MC 125. MC 134. MC 152. E
16. TF P74. MC 81. MC 119. MC 126. MC 142. MC 155. P
17. TF S75. MC 82. MC 120. MC 127. MC 143. MC 156. P- CT
69. MC S76. MC 114. MC 121. MC 128. MC 144. MC
70. MC 77. MC 115. MC 122. MC 129. MC 145. MC
71. MC 78. MC 116. MC 123. MC 131. MC 146. MC
Learning Objective 6
18. TF 20. TF 84. MC P86. MC 88. MC 135. MC 154. P
19. TF 83. MC S85. MC 87. MC 89. MC 153. P 155. P

Learning Objective 7- IFRS
1. TF 4. TF 7. TF 10. TF 13. MC 16. SA
2. TF 5. TF 8. TF 11. MC 14. MC 17. SA
3. TF 6. TF 9. TF 12. MC 15. MC

Note: TF = True-False E = Exercise CT= Critical Thinking
MC = Multiple Choice P = Problem SA= Short Answer
BE =Brief Exercise

TRUE-FALSEConceptual

1. A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

2. Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

3. Magazine subscriptions and airline ticket sales both result in unearned revenues.

4. Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

5. All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

6. A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis and demonstrates the ability to consummate the refinancing.

7. Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

8. A company must accrue a liability for sick pay that accumulates but does not vest.

9. Companies report the amount of social security taxes withheld from employees as well as the companies matching portion as current liabilities until they are remitted.

10. Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

11. Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

12. Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is reasonably possible that a liability has been incurred.

13. A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

14. The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

15. The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

16. The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

17. Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

18. Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

19. Paying a current liability with cash will always reduce the current ratio.

20. Current liabilities are usually recorded and reported in financial statements at their full maturity value.

True False AnswersConceptual
Item Ans. Item Ans. Item Ans. Item Ans.
1. F 6. T 11. T 16. T
2. F 7. T 12. F 17. F
3. T 8. F 13. T 18. F
4. T 9. T 14. F 19. F
5. T 10. F 15. T 20. T

MULTIPLE CHOICEConceptual

21. Liabilities are
a. any accounts having credit balances after closing entries are made.
b. deferred credits that are recognized and measured in conformity with generally accepted accounting principles.
c. obligations to transfer ownership shares to other entities in the future.
d. obligations arising from past transactions and payable in assets or services in the future.

22. Which of the following is a current liability?
a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund
b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue
c. A long-term debt maturing currently, which is to be converted into common stock
d. None of these answers are correct.

23. Which of the following is true about accounts payable?
1. Accounts payable are also called trade accounts payable.
2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used.
3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.
a. 1
b. 2
c. 3
d. Both 2 and 3 are true.

24. Among the short-term obligations of Larsen Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Dennison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Larsen Company as
a. current liabilities.
b. deferred charges.
c. long-term liabilities.
d. intermediate debt.

25. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.
d. Discount on Notes Payable is a contra account to Notes Payable.

26. Which of the following may be a current liability?
a. Withheld Income Taxes
b. Deposits Received from Customers
c. Deferred Revenue
d. All of these answers are correct.

27. Which of the following items is a current liability?
a. Bonds (for which there is an adequate sinking fund properly classified as a long-term investment) due in three months.
b. Bonds due in three years.
c. Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.
d. Bonds to be refunded when due in eight months, there being no doubt about the marketability of the refunding issue.

28. Which of the following should not be included in the current liabilities section of the balance sheet?
a. Trade notes payable
b. Short-term zero-interest-bearing notes payable
c. The discount on short-term notes payable
d. All of these answers are correct.

29. Which of the following is a current liability?
a. Preferred dividends in arrears
b. A dividend payable in the form of additional shares of stock
c. A cash dividend payable to preferred stockholders
d. All of these answers are correct.

30. Stock dividends distributable should be classified on the
a. income statement as an expense.
b. balance sheet as an asset.
c. balance sheet as a liability.
d. balance sheet as an item of stockholders equity.

31. Of the following items, the only one which should not be classified as a current liability is
a. current maturities of long-term debt.
b. sales taxes payable.
c. short-term obligations expected to be refinanced.
d. unearned revenues.

32. An account which would be classified as a current liability is
a. dividends payable in the form of a companys stock.
b. accounts payabledebit balances.
c. losses expected to be incurred within the next twelve months in excess of the companys insurance coverage.
d. none of these answers are correct.

33. Which of the following is a characteristic of a current liability but not a long-term liability?
a. Unavoidable obligation.
b. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
c. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.
d. Transaction or other event creating the liability has already occurred.

34. Which of the following is not considered a part of the definition of a liability?
a. Unavoidable obligation.
b. Transaction or other event creating the liability has already occurred.
c. Present obligation that entails settlement by probable future transfer or use of cash, goods, or services.
d. Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

35. Why is the liability section of the balance sheet of primary importance to bankers?
a. To evaluate the entitys credit quality.
b. To assist in understanding the entitys liquidity.
c. To better understand sources of repayment.
d. To evaluate operating efficiency.

36. What is the relationship between current liabilities and a companys operating cycle?
a. Liquidation of current liabilities is reasonably expected within the companys operating cycle (or one year if less).
b. Current liabilities are the result of operating transactions.
c. Current liabilities cant exceed the amount incurred in one operating cycle.
d. There is no relationship between the two.

37. What is the relationship between present value and the concept of a liability?
a. Present values are used to measure certain liabilities.
b. Present values are not used to measure liabilities.
c. Present values are used to measure all liabilities.
d. Present values are only used to measure long-term liabilities.

38. What is a discount as it relates to zero-interest-bearing notes payable?
a. The discount represents the lenders costs to underwrite the note.
b. The discount represents the credit quality of the borrower.
c. The discount represents the cost of borrowing.
d. The discount represents the allowance for uncollectible amounts.

39. Where is debt callable by the creditor reported on the debtors financial statements?
a. Long-term liability.
b. Current liability if the creditor intends to call the debt within the year, otherwise a long-term liability.
c. Current liability if it is probable that creditor will call the debt within the year, otherwise a long-term liability.
d. Current liability.
40. Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?
a. Intend to refinance the obligation on a long-term basis.
b. Obligation must be due with one year.
c. Demonstrate the ability to complete the refinancing.
d. Subsequently refinance the obligation on a long-term basis.

41. Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?
a. Management indicated that they are going to refinance the obligation.
b. Actually refinance the obligation.
c. Have capacity under existing financing agreements that can be used to refinance the obligation.
d. Enter into a financing agreement that clearly permits the entity to refinance the obligation.

42. A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?
a. Record a liability for cumulative amount of preferred stock dividends not declared.
b. Disclose the amount of the dividends in arrears.
c. Record a liability for the current years dividends only.
d. No disclosure or recognition is required.

43. Which of the following situations may give rise to unearned revenue?
a. Providing trade credit to customers.
b. Selling inventory.
c. Selling magazine subscriptions.
d. Providing manufacturer warranties.

44. Which of the following statements is correct?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis.
b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing.
c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued.
d. None of these answers are correct.

45. The ability to consummate the refinancing of a short-term obligation may be demon- strated by
a. actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued.
b. entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis.
c. actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued.
d. all of these answers are correct.

46. Which of the following statements is false?
a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing.
b. Cash dividends should be recorded as a liability when they are declared by the board of directors.
c. Under the cash basis method, warranty costs are charged to expense as they are paid.
d. FICA taxes withheld from employees payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

47. Which of the following is not a correct statement about sales taxes?
a. Sales taxes are an expense of the seller.
b. Many companies record sales taxes in the sales account.
c. If sales taxes are included in the sales account, the first step to find the amount of sales taxes is to divide sales by 1 plus the sales tax rate.
d. Sales Taxes Payable is classified as a current liability.

S48. If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except
a. a general description of the financing arrangement.
b. the terms of the new obligation incurred or to be incurred.
c. the terms of any equity security issued or to be issued.
d. the number of financing institutions that refused to refinance the debt, if any.

S49. In accounting for compensated absences, the difference between vested rights and accumulated rights is that:
a. vested rights are normally for a longer period of employment than are accumulated rights.
b. vested rights are not contingent upon an employees future service.
c. vested rights are a legal and binding obligation on the company, whereas accumulated rights expire at the end of the accounting period in which they arose.
d. vested rights carry a stipulated dollar amount that is owed to the employee; accumulated rights do not represent monetary compensation.

P50. An employees net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employees
a. portion of FICA taxes and unemployment taxes.
b. and employers portion of FICA taxes, and unemployment taxes.
c. portion of FICA taxes, unemployment taxes, and any union dues.
d. portion of FICA taxes and any union dues.

51. Which of these is not included in an employers payroll tax expense?
a. F.I.C.A. (social security) taxes
b. Federal unemployment taxes
c. State unemployment taxes
d. Federal income taxes

52. Which of the following is a condition for accruing a liability for the cost of compensation for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.

53. A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should
a. be accrued during the period when the compensated time is expected to be used by employees.
b. be accrued during the period following vesting.
c. be accrued during the period when earned.
d. not be accrued unless a written contractual obligation exists.

54. The amount of the liability for compensated absences should be based on
1. the current rates of pay in effect when employees earn the right to compensated absences.
2. the future rates of pay expected to be paid when employees use compensated time.
3. the present value of the amount expected to be paid in future periods.
a. 1.
b. 2.
c. 3.
d. Either 1 or 2 is acceptable.

55. What are compensated absences?
a. Unpaid time off.
b. A form of healthcare.
c. Payroll deductions.
d. Paid time off.

56. Which of the following gives rise to the requirement to accrue a liability for the cost of compensated absences?
a. Payment is probable.
b. Employee rights vest or accumulate.
c. Amount can be reasonably estimated.
d. All of these answers are correct.

57. Under what conditions is an employer required to accrue a liability for sick pay?
a. Sick pay benefits can be reasonably estimated.
b. Sick pay benefits vest.
c. Sick pay benefits equal 100% of the pay.
d. Sick pay benefits accumulate.

58. Which of the following taxes does not represent a common employee payroll deduction?
a. Federal income taxes.
b. FICA taxes.
c. State unemployment taxes.
d. State income taxes.

59. What is a contingency?
a. An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur.
b. An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur.
c. An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.
d. An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.

60. When is a contingent liability recorded?
a. When the amount can be reasonably estimated.
b. When the future events are probable to occur and the amount can be reasonably estimated.
c. When the future events are probable to occur.
d. When the future events will possibly occur and the amount can be reasonably estimated.

61. Which of the following is an example of a contingent liability?
a. Obligations related to product warranties.
b. Possible receipt from a litigation settlement.
c. Pending court case with a probable favorable outcome.
d. Tax loss carryforwards.

62. Which of the following terms is associated with recording a contingent liability?
a. Possible.
b. Likely.
c. Remote.
d. Probable.

63. Which of the following is the proper way to report a gain contingency?
a. As an accrued amount.
b. As deferred revenue.
c. As an account receivable with additional disclosure explaining the nature of the contingency.
d. As a disclosure only.

64. Which of the following contingencies need not be disclosed in the financial statements or the related notes?
a. Probable losses not reasonably estimable
b. Environmental liabilities that cannot be reasonably estimated
c. Guarantees of indebtedness of others
d. All of these must be disclosed.

65. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?
a. Amount of loss is reasonably estimable and event occurs infrequently.
b. Amount of loss is reasonably estimable and occurrence of event is probable.
c. Event is unusual in nature and occurrence of event is probable.
d. Event is unusual in nature and event occurs infrequently.

66. Jeff Brown is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2014, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Brown had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Brown in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Brown appears inclined to accept the Railroads offer. The Railroads 2014 financial statements should include the following related to the incident:
a. recognition of a loss and creation of a liability for the value of the land.
b. recognition of a loss only.
c. creation of a liability only.
d. disclosure in note form only.

67. A loss contingency can be accrued when
a. it is certain that funds are available to settle the disputed amount.
b. an asset may have been impaired.
c. the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability has been incurred.
d. it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.

68. A contingent liability
a. definitely exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not reasonably estimated.
c. is not disclosed in the financial statements.
d. is the result of a loss contingency.

69. To record an asset retirement obligation (ARO), the cost associated with the ARO is
a. expensed.
b. included in the carrying amount of the related long-lived asset.
c. included in a separate account.
d. capitalized over the assets useful life.

70. A company is legally obligated for the costs associated with the retirement of a long-lived asset
a. only when it hires another party to perform the retirement activities.
b. only if it performs the activities with its own workforce and equipment.
c. whether it hires another party to perform the retirement activities or performs the activities itself.
d. when it is probable the asset will be retired.

71. Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty
a. should be reported as long-term.
b. should be reported as current.
c. should be reported as part current and part long-term.
d. need not be disclosed.

72. Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2014. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?
a. No recognition
b. Note disclosure only
c. Operating expense of $800,000 and liability of $800,000
d. Appropriation of retained earnings of $800,000

73. Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be
a. accrued.
b. disclosed but not accrued.
c. neither accrued nor disclosed.
d. classified as an appropriation of retained earnings.

P74. Martinez Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be
a. zero.
b. the minimum of the range.
c. the mean of the range.
d. the maximum of the range.

S75. Darren Company becomes aware of a lawsuit after the date of the financial statements, but before they are issued. A loss and related liability should be reported in the financial statements if the amount can be reasonably estimated, an unfavorable outcome is highly probable, and
a. the Darren Company admits guilt.
b. the court will decide the case within one year.
c. the damages appear to be material.
d. the cause for action occurred during the accounting period covered by the financial statements.

S76. Use of the accrual method in accounting for product warranty costs
a. is required for federal income tax purposes.
b. is frequently justified on the basis of expediency when warranty costs are immaterial.
c. finds the expense account being charged when the seller performs in compliance with the warranty.
d. represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.
77. Which of the following best describes the accrual method of accounting for warranty costs?
a. Expensed when paid.
b. Expensed when warranty claims are certain.
c. Expensed based on estimate in year of sale.
d. Expensed when incurred.

78. Which of the following best describes the cash-basis method of accounting for warranty costs?
a. Expensed based on estimate in year of sale.
b. Expensed when liability is accrued.
c. Expensed when warranty claims are certain.
d. Expensed when incurred.

79. Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?
a. Estimated liability under warranties.
b. Warranty expense.
c. Unearned warranty revenue.
d. Warranty revenue.

80. An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?
a. The reduction in sales price attributed to the coupon is recognized as premium expense.
b. The difference between the cost of the video game and the cash received is recognized as premium expense.
c. Premium expense is not recognized.
d. The difference between the cost of the video game and the selling price prior to the coupon is recognized as premium expense.

81. What condition(s) is/are necessary to recognize an asset retirement obligation?
a. Company has an existing legal obligation and can reasonably estimate the amount of the liability.
b. Company can reasonably estimate the amount of the liability.
c. Company has an existing legal obligation.
d. Obligation event has occurred.

82. Which of the following is not a factor that is considered when evaluating whether or not to record a liability for pending litigation?
a. Time period in which the underlying cause of action occurred.
b. The type of litigation involved.
c. The probability of an unfavorable outcome.
d. The ability to make a reasonable estimate of the amount of the loss.

83. How do you determine the acid-test ratio?
a. The sum of cash and short-term investments divided by short-term debt.
b. Current assets divided by current liabilities.
c. Current assets divided by short-term debt.
d. The sum of cash, short-term investments and net receivables divided by current liabilities.

84. What does the current ratio inform you about a company?
a. The extent of slow-moving inventories.
b. The efficient use of assets.
c. The companys liquidity.
d. The companys profitability.

S85. Which of the following is not an acceptable treatment for the presentation of current liabilities?
a. Listing current liabilities in order of maturity
b. Listing current liabilities according to amount
c. Offsetting current liabilities against assets that are to be applied to their liquidation
d. Showing current liabilities immediately below current assets to obtain a presentation of working capital

P86. The 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.

87. Accrued liabilities are disclosed in financial statements by
a. a footnote to the statements.
b. showing the amount among the liabilities but not extending it to the liability total.
c. an appropriation of retained earnings.
d. appropriately classifying them as regular liabilities in the balance sheet.

88. The numerator of the acid-test ratio consists of
a. total current assets.
b. cash inventory and marketable securities.
c. cash inventory and net receivables.
d. cash, marketable securities, and net receivables.

89. Each of the following are included in both the current ratio and the acid-test ratio except
a. cash.
b. short-term investments.
c. net receivables.
d. inventory.

Multiple Choice AnswersConceptual
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
21. d 31. c 41. a 51. d 61. a 71. c 81. a
22. d 32. d 42. b 52. d 62. d 72. c 82. b
23. a 33. c 43. c 53. c 63. d 73. a 83. d
24. a 34. d 44. d 54. d 64. d 74. b 84. c
25. b 35. b 45. d 55. d 65. b 75. d 85. c
26. d 36. a 46. d 56. d 66. a 76. d 86. a
27. c 37. a 47. a 57. b 67. c 77. c 87. d
28. d 38. c 48. d 58. c 68. d 78. d 88. d
29. c 39. d 49. b 59. d 69. b 79. a *89. d
30. d 40. d 50. d 60. b 70. c 80. b

Solutions to those Multiple Choice questions for which the answer is none of these.
22. A long-term debt maturing currently to be paid with current assets is a current liability.
32. Accounts Payable, Wages Payable, etc., would be examples of current liabilities.
44. The company must both intend to refinance the obligation on a long-term basis and demonstrate the ability to consummate the refinancing to exclude a short-term obligation from current liabilities.

MULTIPLE CHOICEComputational

90. Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2014 for the purchase of $250,000 of inventory. The face value of the note was $253,900. Assuming Greeson used a Discount on Note Payable account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2014 will include a
a. debit to Discount on Note Payable for $1,300.
b. debit to Interest Expense for $2,600.
c. credit to Discount on Note Payable for $1,300.
d. credit to Interest Expense for $2,600.

91. The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 7% is
a. 6.54%.
b. 7%.
c. 14.29%.
d. 7.53%.

92. On September 1, Horton purchased $13,300 of inventory items on credit with the terms 1/15, net 30, FOB destination. Freight charges were $280. Payment for the purchase was made on September 18. Assuming Horton uses the perpetual inventory system and the net method of accounting for purchase discounts, what amount is recorded as inventory from this purchase?
a. $13,167.
b. $13,447.
c. $13,580.
d. $13,300.

93. Slack Inc. borrowed $320,000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31?
a. $0.
b. $38,400.
c. $25,600.
d. $28,800.

94. Craig borrowed $350,000 on October 1, 2014 and is required to pay $360,000 on March 1, 2015. What amount is the note payable recorded at on October 1, 2014 and how much interest is recognized from October 1 to December 31, 2014?
a. $350,000 and $0.
b. $350,000 and $6,000.
c. $360,000 and $0.
d. $350,000 and $10,000.

95. Parton owes $2 million that is due on February 28. The company borrows $1,600,000 on February 25 (5-year note) and uses the proceeds to pay down the $2 million note and uses other cash to pay the balance. How much of the $2 million note is classified as long-term in the December 31 financial statements.
a. $2,000,000.
b. $0.
c. $1,600,000.
d. $400,000.

96. Venible newspapers sold 6,000 of annual subscriptions at $125 each on June 1. How much unearned revenue will exist as of December 31?
a. $0.
b. $312,500.
c. $375,000.
d. $750,000.

97. Bargain Surplus made cash sales during the month of October of $225,000. The sales are subject to a 6% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sale transactions?
a. Debit Accounts Receivable for $225,000.
b. Credit Sales Taxes Payable for $12,736.
c. Credit Sales Revenue for $208,490.
d. Credit Sales Taxes Payable for $13,500.

98. On February 10, 2014, after issuance of its financial statements for 2013, Higgins Company entered into a financing agreement with Cleveland Bank, allowing Higgins Company to borrow up to $6,000,000 at any time through 2016. Amounts borrowed under the agreement bear interest at 2% above the banks prime interest rate and mature two years from the date of loan. Higgins Company presently has $2,250,000 of notes payable with Star National Bank maturing March 15, 2014. The company intends to borrow $3,750,000 under the agreement with Cleveland and liquidate the notes payable to Star National Bank. The agreement with Cleveland also requires Higgins to maintain a working capital level of $9,000,000 and prohibits the payment of dividends on common stock without prior approval by Cleveland Bank. From the above information only, the total short-term debt of Higgins Company as of the December 31, 2013 balance sheet date is
a. $0.
b. $2,250,000.
c. $3,000,000.
d. $6,000,000.

99. On December 31, 2014, Isle Co. has $4,000,000 of short-term notes payable due on February 14, 2015. On January 10, 2013, Isle arranged a line of credit with Beach Bank which allows Isle to borrow up to $3,000,000 at one percent above the prime rate for three years. On February 2, 2015, Isle borrowed $2,400,000 from Beach Bank and used $1,000,000 additional cash to liquidate $3,400,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2014 balance sheet which is issued on March 5, 2015 is
a. $0.
b. $600,000.
c. $1,000,000.
d. $1,600,000.

Use the following information for questions 100 and 101.
Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $251,450.

100. The amount of sales taxes (to the nearest dollar) for May is
a. $20,762.
b. $16,450.
c. $22,631.
d. $17,602.

101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is
a. $12,573.
b. $16,121.
c. $20,762.
d. $17,250.

102. Valley, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law provides that the retail sales tax collected during the month must be remitted to the state during the following month. If the amount collected is remitted to the state on or before the twentieth of the following month, the retailer may keep 3% of the sales tax collected. On April 10, 2014, Valley remitted $135,800 tax to the state tax division for March 2014 retail sales. What was Valleys March 2012 retail sales subject to sales tax?
a. $2,716,000.
b. $2,660,000.
c. $2,800,000.
d. $2,741,667.

103. Jump Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 85,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?
a. $1,700,000
b. $2,500,000
c. $800,000
d. $0

104. Elmer Corporation has $1,800,000 of short-term debt it expects to retire with proceeds from the sale of 50,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?
a. $1,000,000
b. $1,800,000
c. $800,000
d. $0

105. Palco Co., which has a taxable payroll of $900,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the companys state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Palco Co.?
a. $104,400
b. $73,800
c. $36,000
d. $25,200

106. Roxy Co., which has a taxable payroll of $600,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the companys state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Roxy Co.?
a. $70,200
b. $49,200
c. $24,000
d. $16,800

107. A company gives each of its 50 employees (assume they were all employed continuously through 2014 and 2015) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2014, they made $21 per hour and in 2015 they made $24 per hour. During 2015, they took an average of 9 days of vacation each. The companys policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2014 and 2015 balance sheets, respectively?
a. $100,800; $140,400
b. $115,200; $144,000
c. $100,800; $144,000
d. $115,200; $140,400

108. A company gives each of its 50 employees (assume they were all employed continuously through 2014 and 2015) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2014, they made $24.50 per hour and in 2015 they made $28 per hour. During 2015, they took an average of 9 days of vacation each. The companys policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2014 and 2015 balance sheets, respectively?
a. $117,600; $163,800
b. $134,400; $168,000
c. $117,600; $168,000
d. $134,400; $163,800

109. The total payroll of Trolley Company for the month of October, 2014 was $800,000, of which $150,000 represented amounts paid in excess of $106,800 to certain employees. $500,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes. $150,000 of federal income taxes and $15,000 of union dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is .8%, and the current F.I.C.A. tax is 7.65% on an employees wages to $106,800 and 1.45% in excess of $106,800. What amount should Trolley record as payroll tax expense?
a. $72,800.
b. $66,300.
c. $57,300.
d. $61,200.

Use the following information for questions 110 and 111.
Vanco Company has 35 employees who work 8-hour days and are paid hourly. On January 1, 2013, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2013 may first be taken on January 1, 2014. Information relative to these employees is as follows:
Hourly Vacation Days Earned Vacation Days Used
Year Wages by Each Employee by Each Employee
2013 $20.50 10 0
2014 22.50 10 8
2015 25.50 10 10

Vanco has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned.
110. What is the amount of expense relative to compensated absences that should be reported on Vancos income statement for 2013?
a. $0.
b. $71,400.
c. $63,000.
d. $57,400.

111. What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2015?
a. $84,000.
b. $197,400.
c. $71,400.
d. $96,600.

112. Qualpoint pays a weekly payroll of $170,000 that includes federal taxes withheld of $25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the effect of assets and liabilities from this transaction?
a. Assets decrease $170,000 and liabilities do not change.
b. Assets decrease $128,820 and liabilities increase $41,180.
c. Assets decrease $128,820 and liabilities decrease $41,180.
d. Assets decrease $110,820 and liabilities increase $59,180.

113. Qualpoint provides its employees two weeks of paid vacation per year. As of December 31, 65 employees have earned two weeks of vacation time to be taken the following year. If the average weekly salary for these employees is $1,140, what is the required journal entry?
a. Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages Payable for $148,200.
b. No journal entry required.
c. Debit Salaries and Wages Payable for $147,600 and credit Salaries and Wages Expense for $147,600.
d. Debit Salaries and Wages Expense for $74,100 and credit Salaries and Wages Payable for $74,100.

114. Sandy Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $500,000. What is the required journal entry as a result of this litigation?
a. Debit Litigation Expense for $500,000 and credit Litigation liability for $500,000.
b. No journal entry is required.
c. Debit Litigation Expense for $200,000 and credit Litigation Liability for $200,000.
d. Debit Litigation Expense for $300,000 and credit Litigation Liability for $300,000.

115. Xtra Processes is involved with innovative approaches to finding energy reserves. Xtra recently built a facility to extract natural gas at a cost of $15 million. However, Xtra is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $21 million (the present value of which is $8 million). What is the journal entry required to record the asset retirement obligation?
a. No journal entry required.
b. Debit Natural Gas Facility for $21,000,000 and credit Asset Retirement Obligation for $21,000,000
c. Debit Natural Gas Facility for $6,000,000 and credit Asset Retirement Obligation for $6,000,000.
d. Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for $8,000,000.
116. Composite provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for four years. During the current year, Composite provided 42,000 such warranty contracts at an average price of $81 each. Related to these contracts, the company spent $400,000 servicing the contracts during the current year and expects to spend $2,100,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts?
a. $902,000.
b. $3,002,000.
c. $400,000.
d. $450,500.

117. Excom manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $225 per unit sold and reported a liability for estimated warranty costs $7.8 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $243 million and paid warranty claims of $9,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year? (assume accrual method)
a. $2,800,000.
b. $4,500,000.
c. $12,300,000.
d. $13,500,000.

118. A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2014. Historically, 10% of customers mail in the rebate form. During 2014, 3,000,000 packages of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31?
a. $300,000; $300,000
b. $300,000; $140,000
c. $140,000; $140,000
d. $160,000; $140,000

119. A company buys an oil rig for $2,000,000 on January 1, 2014. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220). 10% is an appropriate interest rate for this company. What expense should be recorded for 2014 as a result of these events?
a. Depreciation expense of $240,000
b. Depreciation expense of $200,000 and interest expense of $15,422
c. Depreciation expense of $200,000 and interest expense of $40,000
d. Depreciation expense of $215,422 and interest expense of $15,422

120. Sawyer Company self-insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $1,500,000 per year. The company estimates that on average it will incur losses of $1,200,000 per year. During 2014, $525,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Sawyer Company for 2014?
a. $525,000 in losses and no insurance expense
b. $525,000 in losses and $675,000 in insurance expense
c. $0 in losses and $1,200,000 in insurance expense
d. $0 in losses and $1,500,000 in insurance expense

121. A company offers a cash rebate of $2 on each $6 package of batteries sold during 2014. Historically, 10% of customers mail in the rebate form. During 2014, 6,000,000 packages of batteries are sold, and 210,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31?
a. $1,200,000; $1,200,000
b. $1,200,000; $780,000
c. $780,000; $780,000
d. $420,000; $780,000

122. A company buys an oil rig for $3,000,000 on January 1, 2014. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2014 as a result of these events?
a. Depreciation expense of $360,000
b. Depreciation expense of $300,000 and interest expense of $23,133
c. Depreciation expense of $300,000 and interest expense of $60,000
d. Depreciation expense of $323,133 and interest expense of $23,133

123. During 2013, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturers defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 5% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method)
Sales Actual Warranty Expenditures
2013 $ 1,600,000 $ 39,000
2014 2,500,000 65,000
2015 2,100,000 135,000
$6,200,000 $239,000
What amount should Rao report as a liability at December 31, 2015?
a. $0
b. $134,000
c. $105,000
d. $381,000

124. Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2014, the company sold 675,000 boxes of Frosted Flakes and customers redeemed 330,000 boxtops receiving 110,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2014?
a. $270,000
b. $50,000
c. $75,000
d. $138,000

125. During 2013, Salton Co. introduced a new line of machines that carry a three-year warranty against manufacturers defects. Based on industry experience, warranty costs are estimated at 1% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method)
Sales Actual Warranty Expenditures
2013 $ 1,400,000 $ 26,000
2014 1,000,000 40,000
2015 1,400,000 90,000
$3,800,000 $156,000
What amount should Salton report as a liability at December 31, 2015?
a. $0
b. $14,000
c. $22,000
d. $148,000

126. Crispy Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from Crispy Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2014, the company sold 500,000 boxes of Frosted Flakes and customers redeemed 220,000 boxtops receiving 55,000 bowls. If the bowls cost Crispy Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2014?
a. $150,000
b. $40,000
c. $60,000
d. $84,000

Use the following information for questions 127, 128, and 129.
Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $3 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2014 and 2015 are as follows:
2014 2015
Bags of dog food sold 500,000 600,000
Leashes purchased 18,000 22,000
Coupons redeemed 120,000 150,000

127. The premium expense for 2014 is
a. $187,500.
b. $45,000.
c. $75,000.
d. $84,375.

128. The premium liability at December 31, 2014 is
a. $37,500.
b. $54,000.
c. $45,000.
d. $39,375.

129. The premium liability at December 31, 2015 is
a. $22,500.
b. $39,375.
c. $45,000.
d. $84,375.

130. Wooten Co. is being sued for illness caused to local residents as a result of negligence on the companys part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wootens lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,600,000 to $8,000,000. However, the lawyer states that the most probable cost is $4,800,000. As a result of the above facts, Wooten should accrue
a. a loss contingency of $1,600,000 and disclose an additional contingency of up to $6,400,000.
b. a loss contingency of $4,800,000 and disclose an additional contingency of up to $3,200,000.
c. a loss contingency of $4,800,000 but not disclose any additional contingency.
d. no loss contingency but disclose a contingency of $1,600,000 to $8,000,000.

131. Holland Company estimates its annual warranty expense as 2% of annual net sales. The following data relate to the calendar year 2014:
Net sales $1,500,000
Warranty liability account
Balance, Dec. 31, 2014 $10,000 debit before adjustment
Balance, Dec. 31, 2014 20,000 credit after adjustment
Which one of the following entries was made to record the 2014 estimated warranty expense?(assume the accrual method)
a. Warranty Expense 30,000
Retained Earnings (prior-period adjustment) 5,000
Warranty Liability 25,000
b. Warranty Expense 25,000
Retained Earnings (prior-period adjustment) 5,000
Warranty Liability 30,000
c. Warranty Expense 20,000
Warranty Liability 20,000
d. Warranty Expense 30,000
Warranty Liability 30,000

132. In 2014, Pollard Corporation began selling a new line of products that carry a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows:
First year of warranty 3%
Second year of warranty 5%
Sales and actual warranty expenditures for 2014 and 2015 are presented below:
2014 2015
Sales $500,000 $700,000
Actual warranty expenditures 30,000 50,000

What is the estimated warranty liability at the end of 2015?(assume the accrual method)
a. $16,000.
b. $64,000.
c. $96,000.
d. $20,000.

133. On January 3, 2014, Benton Corp. owned a machine that had cost $300,000. The accumulated depreciation was $180,000, estimated salvage value was $18,000, and fair value was $480,000. On January 4, 2014, this machine was irreparably damaged by Pogo Corp. and became worthless. In October 2014, a court awarded damages of $480,000 against Pogo in favor of Benton. At December 31, 2014, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Bentons attorney, Pogos appeal will be denied. At December 31, 2014, what amount should Benton accrue for this gain contingency?
a. $480,000.
b. $390,000.
c. $300,000.
d. $0.

134. Flavor Food Company distributes to consumers coupons which may be presented (on or before a stated expiration date) to grocers for discounts on certain products of Flavor. The grocers are reimbursed when they send the coupons to Flavor. In Flavors experience, 50% of such coupons are redeemed, and generally one month elapses between the date a grocer receives a coupon from a consumer and the date Flavor receives it. During 2014 Flavor issued two separate series of coupons as follows:
Consumer Amount Disbursed
Issued On Total Value Expiration Date as of 12/31/14
1/1/14 $500,000 6/30/14 $236,000
7/1/14 720,000 12/31/14 300,000
The only journal entry recorded to date is: debit to coup

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