CHAPTER 13

CURRENT LIABILITIES AND CONTINGENCIES

IFRS questions are avai a! e at t"e en# o$ t"is %"a&ter'

TRUE(FALSE)Con%e&tua
Ans*er
F F T T T T T F T F T F T F T T F F F T

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

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

+ULTIPLE CHOICE)Con%e&tua
Ans*er
d d a a b d ! d ! d ! d ! d b a

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

Des%ri&tion

Definition of a liability. "ature of !urrent liabilities. e!ording of a!!ounts payable. %lassifi!ation of notes payable. %lassifi!ation of dis!ounts on notes payable. 1dentify !urrent liability. 2onds reported as !urrent liability. 1dentify item 0'i!' is not a !urrent liability. Dividends reported as !urrent liability. %lassifi!ation of sto!+ dividends distributable. 1dentify item 0'i!' is not a !urrent liability. 1dentify !urrent liability. %'ara!teristi! of !urrent liability. Definition of a liability. 1mportan!e of liability se!tion of balan!e s'eet. %urrent liabilities and operating !y!le.

13 ( 2

Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition

+ULTIPLE CHOICE)Con%e&tua 0%ont'1

Ans*er
a ! d d a b ! d d d a d b d d d ! d d d b ! d b a d d d b a ! d b ! ! ! a b d d ! d a b a b d !

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

Des%ri&tion
#resent value and !on!ept of a liability. Zero-interest-bearing notes payable. %allable debt reporting. %ondition to ex!lude s'ort-term obligation. )bility to !onsummate refinan!ing of s'ort-term debt. Dis!losure of preferred dividends not de!lared. Example of unearned revenue. -'ort-term obligations expe!ted to be refinan!ed. )bility to !onsummate refinan!ing of s'ort-term obligations. Determine 0'at is a liability. %lassifi!ation of sales taxes. Dis!losure for s'ort-term debt refinan!ed. 3ested rig'ts vs. a!!umulated rig'ts. Dedu!tions in !omputing net pay. Employer4s payroll tax expense. )!!rual of a liability for !ompensated absen!es. )!!rual of a liability for !ompensated absen!es. )!!rual of a liability for !ompensated absen!es. %ompensated absen!es. e5uirements for !ompensated absen!es a!!rual. %ondition for si!+ pay a!!rual. #ayroll tax dedu!tion. Definition of a !ontingen!y. e!ording !ontingent liability. Example of !ontingent liability. e!ording !ontingent liability. Dis!losure of a gain !ontingen!y. Dis!losure of !ontingen!ies. )!!rual of loss !ontingen!y. 6itigation and loss !ontingen!ies. )!!rual of a !ontingent liability. -our!e of a !ontingent liability. )sset retirement obligation. )sset retirement obligation. %lassifi!ation of 0arranty liability. 6iability a!!rual due to governmental a!tion. )!!rual of produ!t 0arranties. Determining loss amount to report. eporting la0suit loss and liability. )!!rual met'od for 0arranty !osts. )!!rual 0arranty met'od. %as'-basis 0arranty met'od. %'ara!teristi! of expense 0arranty approa!'. )!!ounting for dis!ount !oupon. %ondition to re!ogni/e asset retirement obligation. e!ording liability for pending litigation. %omputation of a!id-test ratio. %urrent ratio information.

%urrent 6iabilities and %ontingen!ies

13 ( 3

+ULTIPLE CHOICE)Con%e&tua 0%ont'1

Ans*er
! a d d d
# -

No'
#

Des%ri&tion
#resentation of !urrent liabilities. %urrent ratio formula. Dis!losure of a!!rued liabilities. )!id-test ratio elements. 1tems in!luded in !urrent ratio and a!id-test ratio.

*$. *&. *(. **. *,.

T'ese 5uestions also appear in t'e #roblem--olving -urvival 7uide. T'ese 5uestions also appear in t'e -tudy 7uide.

+ULTIPLE CHOICE)Co-&utationa
Ans*er
b d a d b ! b d b d b b ! a a d d ! ! ! d a d a b d d ! b d a b d d ,.. ,1. ,2. ,3. ,4. ,$. ,&. ,(. ,*. ,,. 1... 1.1. 1.2. 1.3. 1.4. 1.$. 1.&. 1.(. 1.*. 1.,. 11.. 111. 112. 113. 114. 11$. 11&. 11(. 11*. 11,. 12.. 121. 122. 123.

No'

Des%ri&tion

)d8usting entry involving dis!ount on s'ort-term note payable. %al!ulate effe!tive interest on dis!ounted note. %al!ulate !ost of inventory pur!'ase. %al!ulate interest expense. %al!ulate t'e amount of note payable and interest expense. eporting $-year note in finan!ial statements. %al!ulate unearned revenue. %al!ulate amount of sales tax payable. Determine amount of s'ort-term debt to be reported. Determine amount of s'ort-term debt to be reported. %al!ulate sales taxes for t'e mont'. %al!ulate amount of sales taxes payable. Determine amount of sales sub8e!t to sales tax. -'ort-term debt to be ex!luded. -'ort-term debt to be ex!luded. Federal9state unemployment taxes. Federal9state unemployment taxes. 3a!ation liability a!!rual. 3a!ation liability a!!rual. %al!ulate payroll tax expense. %al!ulation of va!ation expense to be re!ogni/ed. %al!ulation of a!!rued liability to be re!ogni/ed for !ompensated balan!es. Effe!t of payroll taxes on assets 9 liabilities. e!ord va!ation liability a!!rual. e!ord loss !ontingen!y amount. e!ord asset retirement obligation. %al!ulate extended 0arranty !ontra!t profit. %al!ulate 0arranty liability. %al!ulate rebate expense and liability. )sset retirement obligation. %al!ulate insuran!e expense and loss. %al!ulate rebate expense and liability. )sset retirement obligation. %al!ulate 0arranty liability.

13 ( 4

Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition

+ULTIPLE CHOICE)Co-&utationa 0%ont'1

Ans*er
b d b d d d b d a d b ! 124. 12$. 12&. 12(. 12*. 12,. 13.. 131. 132. 133. 134. 13$.

No'

Des%ri&tion

%al!ulate liability for premiums. %al!ulate 0arranty liability. %al!ulate liability for premiums. Determine premiums expense for t'e year. %al!ulate estimated liability for premiums. %al!ulate estimated liability for premiums. Determine amount to a!!rue as a loss !ontingen!y. )!!rue 0arranty expense for t'e year. %al!ulate 0arranty liability. Determine amount to a!!rue as a gain !ontingen!y. %al!ulate liability for unredeemed !oupons. %al!ulate t'e 5ui!+ :a!id-test; ratio.

+ULTIPLE CHOICE)CPA A#a&te#

Ans*er
a b ! d a d b ! d d ! 13&. 13(. 13*. 13,. 14.. 141. 142. 143. 144. 14$. 14&.

No'

Des%ri&tion

<no0ledge of a!!ounts payable. Determine !urrent and long-term portions of debt. Determine a!!rued interest payable. Determine amount of s'ort-term debt to be reported. %al!ulate a!!rued salaries payable. )!!rual of payroll taxes. %al!ulate unearned servi!e !ontra!t revenue. Determine liability from unredeemed trading stamps. Determine range of loss a!!rual. %al!ulate t'e estimated 0arranty liability. Dis!losure of a !asualty !laim.

BRIEF E3ERCISES
2E13-14( 2E13-14*

Ite-

Des%ri&tion

"otes payable. #ayroll entries.

E3ERCISES
E13-14, E13-1$. E13-1$1 E13-1$2 %ompensated absen!es. %ontingent liabilities. #remiums. #remiums.

PROBLE+S
#13-1$3 #13-1$4 #13-1$$ #13-1$&

Ite-

Des%ri&tion

)!!ounts and notes payable. efinan!ing of s'ort-term debt. #remiums. =arranties.

%urrent 6iabilities and %ontingen!ies

13 ( 5

13 ( 8

Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition

CHAPTER LEARNING OB6ECTI7ES

1. 2. 3. 4. $. &. Des!ribe t'e nature> type> and valuation of !urrent liabilities. Explain t'e !lassifi!ation issues of s'ort-term debt expe!ted to be refinan!ed. 1dentify types of employee-related liabilities. 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.

(. %ompare t'e a!!ounting pro!edures for !urrent liabilities and !ontingen!ies under 7))# and 1F -.

%urrent 6iabilities and %ontingen!ies

13 ( <

SU++AR9 OF LEARNING OB6ECTI7ES B9 :UESTIONS

Item 1. 2. 3. 4. 21. $. &. (. 4.. *. ,. 1.. 11. 12. 13. 4&. 14. 1$. 1&. 1(. &,. (.. (1. 1*. 1,. 1. 2. 3. "ote@ Type TF TF TF TF ?% TF TF TF ?% TF TF TF TF TF TF ?% TF TF TF TF ?% ?% ?% TF TF TF TF TF Item 22. 23. 24. 2$. 2&. 41. 42. 43. 44. 4&. 4,. # $.. $1.
-

Type ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% TF ?% TF TF TF

Item 2(. 2*. 2,. 3.. 31. 4$. 4&. 4(. 4*. $2. $3. $4. $$. &2. &3. &4. (,. *.. *1. *2. 114. 11$. 11&. *4. *$. (. *. ,.

Type

Item

Type

Item

Type ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?% ?%

Item ,2. ,3. ,4. 13&. 13(. 1.3. 1.4. 13,. 1$4. 11.. 111. 112. 113. 1$..

Type ?% ?% ?% ?% ?% ?% ?% ?% # ?% ?% ?% ?% E%T

Item 13*. 14(. 1$3.

Type ?% 2E #

$,. &.. &1. (2. (3. # (4. ($.

-

Learnin. O!;e%tive 1 ?% 32. ?% 3(. ?% 33. ?% 3*. ?% 34. ?% 3,. ?% 3$. ?% ,.. ?% 3&. ?% ,1. Learnin. O!;e%tive 2 ?% ,$. ?% ,,. ?% ,&. ?% 1... ?% ,(. ?% 1.1. ?% ,*. ?% 1.2. Learnin. O!;e%tive 3 ?% $&. ?% 1.&. ?% $(. ?% 1.(. ?% $*. ?% 1.*. ?% 1.$. ?% 1.,. Learnin. O!;e%tive 4 ?% &$. ?% &*. ?% &&. ?% 13.. ?% &(. ?% 133. Learnin. O!;e%tive 5 ?% 11(. ?% 124. ?% 11*. ?% 12$. ?% 11,. ?% 12&. ?% 12.. ?% 12(. ?% 121. ?% 12*. ?% 122. ?% 12,. ?% 123. ?% 131. Learnin. O!;e%tive 8 # ?% *&. ?% **. ?% *(. ?% *,.

14.. 141. 14*. 14,.

?% ?% 2E E

132. 134. 142. 143. 144. 14$. 14&. 13$. 1$3. 1&.

?% ?% ?% ?% ?% ?% ?% ?% # -)

1$1. 1$2. 1$$. 1$&.

(&. ((. (*. 2.. *3. 4. $. &.

E E # #%T

1$4. 1$$.

# #

Learnin. O!;e%tive <( IFRS TF 1.. TF 13. ?% TF 11. ?% 14. ?% TF 12. ?% 1$. ?% E A Exer!ise # A #roblem

TF A True-False ?% A ?ultiple %'oi!e 2E A 2rief Exer!ise

%TA %riti!al T'in+ing -)A -'ort )ns0er

13 ( =

Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition

TRUE(FALSE)Con%e&tua
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. ?aga/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. $. )ll long-term debt maturing 0it'in t'e next year must be !lassified as a !urrent liability on t'e balan!e s'eet. &. ) s'ort-term obligation !an be ex!luded from !urrent liabilities if t'e !ompany intends to refinan!e it on a long-term basis and demonstrates t'e ability to !onsummate t'e refinan!ing. (. ?any !ompanies do not segregate t'e sales tax !olle!ted and t'e amount of t'e sale at t'e time of t'e sale. *. ) !ompany must a!!rue a liability for si!+ pay t'at a!!umulates but does not vest. ,. %ompanies report t'e amount of so!ial se!urity taxes 0it''eld from employees as 0ell as t'e !ompaniesB mat!'ing portion as !urrent liabilities until t'ey are remitted. 1.. )!!umulated rig'ts exist 0'en an employer 'as an obligation to ma+e payment to an employee even after terminating 'is employment. 11. %ompanies s'ould re!ogni/e t'e expense and related liability for !ompensated absen!es in t'e year earned by employees. 12. %ompanies s'ould a!!rue an estimated loss from a loss !ontingen!y if information available prior to t'e issuan!e of finan!ial statements indi!ates t'at it is reasonably possible t'at a liability 'as been in!urred. 13. ) !ompany dis!loses gain !ontingen!ies in t'e notes only 0'en a 'ig' probability exists for reali/ing t'em. 14. T'e expe!ted profit from a sales type 0arranty t'at !overs several years s'ould all be re!ogni/ed in t'e period t'e 0arranty is sold. 1$. 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(. Cnder t'e expense 0arranty approa!'> !ompanies !'arge 0arranty !osts only to t'e period in 0'i!' t'ey !omply 0it' t'e 0arranty. 1*. #repaid insuran!e s'ould be in!luded in t'e numerator 0'en !omputing t'e a!id-test :5ui!+; ratio.

%urrent 6iabilities and %ontingen!ies 1,. #aying a !urrent liability 0it' !as' 0ill al0ays redu!e t'e !urrent ratio.

13 ( >

2.. %urrent liabilities are usually re!orded and reported in finan!ial statements at t'eir full maturity value.

True Fa se Ans*ers)Con%e&tua
Ite1. 2. 3. 4. $. Ans' F F T T T Ite&. (. *. ,. 1.. Ans' T T F T F Ite11. 12. 13. 14. 1$. Ans' T F T F T Ite1&. 1(. 1*. 1,. 2.. Ans' T F F F T

+ULTIPLE CHOICE)Con%e&tua
21. 6iabilities 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. ='i!' of t'e follo0ing is a !urrent liabilityD 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 ans0ers are !orre!t. ='i!' of t'e follo0ing is true about a!!ounts payableD 1. )!!ounts payable are also !alled trade a!!ounts payable. 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 6ost a!!ount 0ill be used.

22.

23.

a. b. !. d. 24.

1 2 3 2ot' 2 and 3 are true.

)mong t'e s'ort-term obligations of 6arsen %ompany as of De!ember 31> t'e balan!e s'eet date> are notes payable totaling E2$.>... 0it' t'e Dennison "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 6arsen %ompany as a. !urrent liabilities. b. deferred !'arges. !. long-term liabilities. d. intermediate debt.

13 ( 1? Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition 2$. ='i!' of t'e follo0ing is not true about t'e dis!ount on s'ort-term notes payableD 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. Dis!ount on "otes #ayable is a !ontra a!!ount to "otes #ayable. ='i!' of t'e follo0ing may be a !urrent liabilityD a. =it''eld 1n!ome Taxes b. Deposits e!eived from %ustomers !. Deferred evenue d. )ll of t'ese ans0ers are !orre!t. ='i!' of t'e follo0ing items is a !urrent liabilityD a. 2onds :for 0'i!' t'ere is an ade5uate 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 ade5uate 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. ='i!' of t'e follo0ing s'ould not be in!luded in t'e !urrent liabilities se!tion of t'e balan!e s'eetD 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 ans0ers are !orre!t. ='i!' of t'e follo0ing is a !urrent liabilityD 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 ans0ers are !orre!t. -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 e5uity. Ff 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.

2&.

2(.

2*.

2,.

3..

31.

%urrent 6iabilities and %ontingen!ies 32.

13 ( 11

)n a!!ount 0'i!' 0ould be !lassified as a !urrent liability is a. dividends payable in t'e form of a !ompany4s sto!+. b. a!!ounts payableGdebit 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 ans0ers are !orre!t. ='i!' of t'e follo0ing is a !'ara!teristi! of a !urrent liability but not a long-term liabilityD a. Cnavoidable obligation. b. #resent obligation t'at entails settlement by probable future transfer or use of !as'> goods> or servi!es. !. 6i5uidation is reasonably expe!ted to re5uire use of existing resour!es !lassified as !urrent assets or !reate ot'er !urrent liabilities. d. Transa!tion or ot'er event !reating t'e liability 'as already o!!urred. ='i!' of t'e follo0ing is not !onsidered a part of t'e definition of a liabilityD a. Cnavoidable obligation. b. Transa!tion or ot'er event !reating t'e liability 'as already o!!urred. !. #resent obligation t'at entails settlement by probable future transfer or use of !as'> goods> or servi!es. d. 6i5uidation is reasonably expe!ted to re5uire use of existing resour!es !lassified as !urrent assets or !reate ot'er !urrent liabilities. ='y is t'e liability se!tion of t'e balan!e s'eet of primary importan!e to ban+ersD a. To evaluate t'e entity4s !redit 5uality. b. To assist in understanding t'e entity4s li5uidity. !. To better understand sour!es of repayment. d. To evaluate operating effi!ien!y. ='at is t'e relations'ip bet0een !urrent liabilities and a !ompany4s operating !y!leD a. 6i5uidation of !urrent liabilities is reasonably expe!ted 0it'in t'e !ompany4s operating !y!le :or one year if less;. b. %urrent liabilities are t'e result of operating transa!tions. !. %urrent liabilities !an4t ex!eed t'e amount in!urred in one operating !y!le. d. T'ere is no relations'ip bet0een t'e t0o. ='at is t'e relations'ip bet0een present value and t'e !on!ept of a liabilityD a. #resent values are used to measure !ertain liabilities. b. #resent values are not used to measure liabilities. !. #resent values are used to measure all liabilities. d. #resent values are only used to measure long-term liabilities. ='at is a dis!ount as it relates to /ero-interest-bearing notes payableD a. T'e dis!ount represents t'e lender4s !osts to under0rite t'e note. b. T'e dis!ount represents t'e !redit 5uality of t'e borro0er. !. T'e dis!ount represents t'e !ost of borro0ing. d. T'e dis!ount represents t'e allo0an!e for un!olle!tible amounts. ='ere is debt !allable by t'e !reditor reported on t'e debtor4s finan!ial statementsD a. 6ong-term liability. b. %urrent liability if t'e !reditor intends to !all t'e debt 0it'in t'e year> ot'er0ise a longterm liability. !. %urrent liability if it is probable t'at !reditor 0ill !all t'e debt 0it'in t'e year> ot'er0ise a long-term liability. d. %urrent liability.

33.

34.

3$.

3&.

3(.

3*.

3,.

13 ( 12 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition 4.. ='i!' of t'e follo0ing is not a !ondition ne!essary to ex!lude a s'ort-term obligation from !urrent liabilitiesD a. 1ntend to refinan!e t'e obligation on a long-term basis. b. Fbligation must be due 0it' one year. !. Demonstrate t'e ability to !omplete t'e refinan!ing. d. -ubse5uently refinan!e t'e obligation on a long-term basis. ='i!' of t'e follo0ing does not demonstrate eviden!e regarding t'e ability to !onsummate a refinan!ing of s'ort-term debtD a. ?anagement indi!ated t'at t'ey are going to refinan!e t'e obligation. b. )!tually refinan!e t'e obligation. !. Have !apa!ity under existing finan!ing agreements t'at !an be used to refinan!e t'e obligation. d. Enter into a finan!ing agreement t'at !learly permits t'e entity to refinan!e t'e obligation. ) !ompany 'as not de!lared a dividend on its !umulative preferred sto!+ for t'e past t'ree years. ='at is t'e re5uired a!!ounting treatment or dis!losure in t'is situationD a. e!ord a liability for !umulative amount of preferred sto!+ dividends not de!lared. b. Dis!lose t'e amount of t'e dividends in arrears. !. e!ord a liability for t'e !urrent year4s dividends only. d. "o dis!losure or re!ognition is re5uired. ='i!' of t'e follo0ing situations may give rise to unearned revenueD a. #roviding trade !redit to !ustomers. b. -elling inventory. !. -elling maga/ine subs!riptions. d. #roviding manufa!turer 0arranties. ='i!' of t'e follo0ing statements is !orre!tD 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 subse5uently repla!ed by long-term debt before t'e balan!e s'eet is issued. d. "one of t'ese ans0ers are !orre!t. T'e ability to !onsummate t'e refinan!ing of a s'ort-term obligation may be demonstrated 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 e5uity se!urities after t'e date of t'e balan!e s'eet but before it is issued. d. all of t'ese ans0ers are !orre!t.

41.

42.

43.

44.

4$.

%urrent 6iabilities and %ontingen!ies 4&.

13 ( 13

='i!' of t'e follo0ing statements is $a se? 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. !. Cnder 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. ='i!' of t'e follo0ing is not a !orre!t statement about sales taxesD a. -ales taxes are an expense of t'e seller. b. ?any !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. -ales Taxes #ayable is !lassified as a !urrent liability. 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 e@%e&t 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 e5uity 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. 1n a!!ounting for !ompensated absen!es> t'e differen!e bet0een vested rig'ts and a!!umulated rig'ts is t'at@ 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. )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 union dues. d. portion of F1%) taxes and any union dues. ='i!' of t'ese is not in!luded in an employer4s payroll tax expenseD a. F.1.%.). :so!ial se!urity; taxes b. Federal unemployment taxes !. -tate unemployment taxes d. Federal in!ome taxes

4(.

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4,.

$..

$1.

13 ( 14 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition $2. ='i!' of t'e follo0ing is a !ondition for a!!ruing a liability for t'e !ost of !ompensation for future absen!esD 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. ) 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. 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.

$3.

$4.

a. b. !. d. $$.

1. 2. 3. Eit'er 1 or 2 is a!!eptable.

='at are !ompensated absen!esD a. Cnpaid time off. b. ) form of 'ealt'!are. !. #ayroll dedu!tions. d. #aid time off. ='i!' of t'e follo0ing gives rise to t'e re5uirement to a!!rue a liability for t'e !ost of !ompensated absen!esD a. #ayment is probable. b. Employee rig'ts vest or a!!umulate. !. )mount !an be reasonably estimated. d. )ll of t'ese ans0ers are !orre!t. Cnder 0'at !onditions is an employer re5uired to a!!rue a liability for si!+ payD a. -i!+ pay benefits !an be reasonably estimated. b. -i!+ pay benefits vest. !. -i!+ pay benefits e5ual 1..J of t'e pay. d. -i!+ pay benefits a!!umulate. ='i!' of t'e follo0ing taxes does not represent a !ommon employee payroll dedu!tionD a. Federal in!ome taxes. b. F1%) taxes. !. -tate unemployment taxes. d. -tate in!ome taxes.

$&.

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

13 ( 15

='at is a !ontingen!yD a. )n existing situation 0'ere !ertainty exists as to a gain or loss t'at 0ill be resolved 0'en one or more future events o!!ur or fail to o!!ur. b. )n existing situation 0'ere un!ertainty exists as to possible loss t'at 0ill be resolved 0'en one or more future events o!!ur. !. )n existing situation 0'ere un!ertainty exists as to possible gain or loss t'at 0ill not be resolved in t'e foreseeable future. d. )n existing situation 0'ere un!ertainty exists as to possible gain or loss t'at 0ill be resolved 0'en one or more future events o!!ur or fail to o!!ur. ='en is a !ontingent liability re!ordedD a. ='en t'e amount !an be reasonably estimated. b. ='en t'e future events are probable to o!!ur and t'e amount !an be reasonably estimated. !. ='en t'e future events are probable to o!!ur. d. ='en t'e future events 0ill possibly o!!ur and t'e amount !an be reasonably estimated. ='i!' of t'e follo0ing is an example of a !ontingent liabilityD a. Fbligations related to produ!t 0arranties. b. #ossible re!eipt from a litigation settlement. !. #ending !ourt !ase 0it' a probable favorable out!ome. d. Tax loss !arryfor0ards. ='i!' of t'e follo0ing terms is asso!iated 0it' re!ording a !ontingent liabilityD a. #ossible. b. 6i+ely. !. emote. d. #robable. ='i!' of t'e follo0ing is t'e proper 0ay to report a gain !ontingen!yD 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. ='i!' of t'e follo0ing !ontingen!ies need not be dis!losed in t'e finan!ial statements or t'e related notesD a. #robable losses not reasonably estimable b. Environmental liabilities t'at !annot be reasonably estimated !. 7uarantees of indebtedness of ot'ers d. )ll of t'ese must be dis!losed. ='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!iplesD a. )mount of loss is reasonably estimable and event o!!urs infre5uently. 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 infre5uently.

&..

&1.

&2.

&3.

&4.

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13 ( 18 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition &&. Keff 2ro0n is a farmer 0'o o0ns land 0'i!' borders on t'e rig't-of-0ay of t'e "ort'ern ailroad. Fn )ugust 1.> 2.14> due to t'e admitted negligen!e of t'e ailroad> 'ay on t'e farm 0as set on fire and burned. 2ro0n '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 2ro0n in ex!'ange for a release of 'is rig't to reimbursement for t'e loss 'e 'as sustained from t'e fire. 2ro0n appears in!lined to a!!ept t'e ailroad4s offer. T'e ailroad4s 2.14 finan!ial statements s'ould in!lude t'e follo0ing related to t'e in!ident@ 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. ) loss !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 'as been 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. ) !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 :) F;> t'e !ost asso!iated 0it' t'e ) F 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. !apitali/ed over t'e asset4s useful life. ) !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 e5uipment. !. 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. )ssume t'at a manufa!turing !orporation 'as :1; good 5uality !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.

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%urrent 6iabilities and %ontingen!ies (2.

13 ( 1<

Fverton %orporation> a manufa!turer of 'ouse'old paints> is preparing annual finan!ial statements at De!ember 31> 2.14. 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 Fverton re!all all !ans of t'is paint sold in t'e last six mont's. T'e management of Fverton estimates t'at t'is re!all 0ould !ost E*..>.... ='at a!!ounting re!ognition> if any> s'ould be a!!orded t'is situationD a. "o re!ognition b. "ote dis!losure only !. Fperating expense of E*..>... and liability of E*..>... d. )ppropriation of retained earnings of E*..>... 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. ?artine/ %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. No 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. Darren %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 Darren %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. Cse of t'e a!!rual met'od in a!!ounting for produ!t 0arranty !osts a. is re5uired for federal in!ome tax purposes. b. is fre5uently 8ustified 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 best des!ribes t'e a!!rual met'od of a!!ounting for 0arranty !ostsD a. Expensed 0'en paid. b. Expensed 0'en 0arranty !laims are !ertain. !. Expensed based on estimate in year of sale. d. Expensed 0'en in!urred.

(3.

(4.

($.

(&.

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13 ( 1= Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition (*. ='i!' of t'e follo0ing best des!ribes t'e !as'-basis met'od of a!!ounting for 0arranty !ostsD a. Expensed based on estimate in year of sale. b. Expensed 0'en liability is a!!rued. !. Expensed 0'en 0arranty !laims are !ertain. d. Expensed 0'en in!urred. ='i!' of t'e follo0ing is a !'ara!teristi! of t'e expense 0arranty approa!'> but not t'e sales 0arranty approa!'D a. Estimated liability under 0arranties. b. =arranty expense. !. Cnearned 0arranty revenue. d. =arranty revenue. )n ele!troni!s store is running a promotion 0'ere for every video game pur!'ased> t'e !ustomer re!eives a !oupon upon !'e!+out to pur!'ase a se!ond game at a $.J dis!ount. T'e !oupons expire in one year. T'e store normally re!ogni/ed a gross profit margin of 4.J of t'e selling pri!e on video games. Ho0 0ould t'e store a!!ount for a pur!'ase using t'e dis!ount !ouponD a. T'e redu!tion in sales pri!e attributed to t'e !oupon is re!ogni/ed as premium expense. b. T'e differen!e bet0een t'e !ost of t'e video game and t'e !as' re!eived is re!ogni/ed as premium expense. !. #remium expense is not re!ogni/ed. d. T'e differen!e bet0een t'e !ost of t'e video game and t'e selling pri!e prior to t'e !oupon is re!ogni/ed as premium expense. ='at !ondition:s; is9are ne!essary to re!ogni/e an asset retirement obligationD a. %ompany 'as an existing legal obligation and !an reasonably estimate t'e amount of t'e liability. b. %ompany !an reasonably estimate t'e amount of t'e liability. !. %ompany 'as an existing legal obligation. d. Fbligation event 'as o!!urred. ='i!' of t'e follo0ing is not a fa!tor t'at is !onsidered 0'en evaluating 0'et'er or not to re!ord a liability for pending litigationD a. Time period in 0'i!' t'e underlying !ause of a!tion o!!urred. b. T'e type of litigation involved. !. T'e probability of an unfavorable out!ome. d. T'e ability to ma+e a reasonable estimate of t'e amount of t'e loss. Ho0 do you determine t'e a!id-test ratioD a. T'e sum of !as' and s'ort-term investments divided by s'ort-term debt. b. %urrent assets divided by !urrent liabilities. !. %urrent assets divided by s'ort-term debt. d. T'e sum of !as'> s'ort-term investments and net re!eivables divided by !urrent liabilities. ='at does t'e !urrent ratio inform you about a !ompanyD a. T'e extent of slo0-moving inventories. b. T'e effi!ient use of assets. !. T'e !ompany4s li5uidity. d. T'e !ompany4s profitability.

(,.

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*4.

%urrent 6iabilities and %ontingen!ies

-

13 ( 1>

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='i!' of t'e follo0ing is not an a!!eptable treatment for t'e presentation of !urrent liabilitiesD a. 6isting !urrent liabilities in order of maturity b. 6isting !urrent liabilities a!!ording to amount !. Fffsetting !urrent liabilities against assets t'at are to be applied to t'eir li5uidation 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. T'e numerator of t'e a!id-test ratio !onsists of a. total !urrent assets. b. !as' inventory and mar+etable se!urities. !. !as' inventory and net re!eivables. d. !as'> mar+etable se!urities> and net re!eivables. Ea!' of t'e follo0ing are in!luded in bot' t'e !urrent ratio and t'e a!id-test ratio e@%e&t a. !as'. b. s'ort-term investments. !. net re!eivables. d. inventory.

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IteAns' IteAns' IteAns' IteAns' IteAns' IteAns' IteAns'

21. 22. 23. 24. 2$. 2&. 2(. 2*. 2,. 3..

d d a a b d ! d ! d

31. 32. 33. 34. 3$. 3&. 3(. 3*. 3,. 4..

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41. 42. 43. 44. 4$. 4&. 4(. 4*. 4,. $..

a b ! d d d a d b d

$1. $2. $3. $4. $$. $&. $(. $*. $,. &..

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13 ( 2? Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition -olutions to t'ose ?ultiple %'oi!e 5uestions for 0'i!' t'e ans0er is Mnone of t'ese.N 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. 44. 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 CHOICE)Co-&utationa
,.. 7reeson %orp. signed a t'ree-mont'> /ero-interest-bearing note on "ovember 1> 2.14 for t'e pur!'ase of E2$.>... of inventory. T'e fa!e value of t'e note 0as E2$3>,... )ssuming 7reeson used a MDis!ount on "ote #ayableN a!!ount to initially re!ord t'e note and t'at t'e dis!ount 0ill be amorti/ed e5ually over t'e 3-mont' period> t'e ad8usting entry made at De!ember 31> 2.14 0ill in!lude a a. debit to Dis!ount on "ote #ayable for E1>3... b. debit to 1nterest Expense for E2>&... !. !redit to Dis!ount on "ote #ayable for E1>3... d. !redit to 1nterest Expense for E2>&... T'e effe!tive interest on a 12-mont'> /ero-interest-bearing note payable of E3..>...> dis!ounted at t'e ban+ at (J is a. &.$4J. b. (J. !. 14.2,J. d. (.$3J. Fn -eptember 1> Horton pur!'ased E13>3.. of inventory items on !redit 0it' t'e terms 191$> net 3.> FF2 destination. Freig't !'arges 0ere E2*.. #ayment for t'e pur!'ase 0as made on -eptember 1*. )ssuming Horton uses t'e perpetual inventory system and t'e net met'od of a!!ounting for pur!'ase dis!ounts> 0'at amount is re!orded as inventory from t'is pur!'aseD a. E13>1&(. b. E13>44(. !. E13>$*.. d. E13>3... -la!+ 1n!. borro0ed E32.>... on )pril 1. T'e note re5uires interest at 12J and prin!ipal to be paid in one year. Ho0 mu!' interest is re!ogni/ed for t'e period from )pril 1 to De!ember 31D a. E.. b. E3*>4... !. E2$>&... d. E2*>*...

,1.

,2.

,3.

%urrent 6iabilities and %ontingen!ies ,4.

13 ( 21

%raig borro0ed E3$.>... on F!tober 1> 2.14 and is re5uired to pay E3&.>... on ?ar!' 1> 2.1$. ='at amount is t'e note payable re!orded at on F!tober 1> 2.14 and 'o0 mu!' interest is re!ogni/ed from F!tober 1 to De!ember 31> 2.14D a. E3$.>... and E.. b. E3$.>... and E&>.... !. E3&.>... and E.. d. E3$.>... and E1.>.... #arton o0es E2 million t'at is due on February 2*. T'e !ompany borro0s E1>&..>... on February 2$ :$-year note; and uses t'e pro!eeds to pay do0n t'e E2 million note and uses ot'er !as' to pay t'e balan!e. Ho0 mu!' of t'e E2 million note is !lassified as longterm in t'e De!ember 31 finan!ial statements. a. E2>...>.... b. E.. !. E1>&..>.... d. E4..>.... 3enible ne0spapers sold &>... of annual subs!riptions at E12$ ea!' on Kune 1. Ho0 mu!' unearned revenue 0ill exist as of De!ember 31D a. E.. b. E312>$... !. E3($>.... d. E($.>.... 2argain -urplus made !as' sales during t'e mont' of F!tober of E22$>.... T'e sales are sub8e!t to a &J sales tax t'at 0as also !olle!ted. ='i!' of t'e follo0ing 0ould be in!luded in t'e summary 8ournal entry to refle!t t'e sale transa!tionsD a. Debit )!!ounts e!eivable for E22$>.... b. %redit -ales Taxes #ayable for E12>(3&. !. %redit -ales evenue for E2.*>4,.. d. %redit -ales Taxes #ayable for E13>$... Fn February 1.> 2.14> after issuan!e of its finan!ial statements for 2.13> Higgins %ompany entered into a finan!ing agreement 0it' %leveland 2an+> allo0ing Higgins %ompany to borro0 up to E&>...>... at any time t'roug' 2.1&. )mounts borro0ed under t'e agreement bear interest at 2J above t'e ban+4s prime interest rate and mature t0o years from t'e date of loan. Higgins %ompany presently 'as E2>2$.>... of notes payable 0it' -tar "ational 2an+ maturing ?ar!' 1$> 2.14. T'e !ompany intends to borro0 E3>($.>... under t'e agreement 0it' %leveland and li5uidate t'e notes payable to -tar "ational 2an+. T'e agreement 0it' %leveland also re5uires Higgins to maintain a 0or+ing !apital level of E,>...>... and pro'ibits t'e payment of dividends on !ommon sto!+ 0it'out prior approval by %leveland 2an+. From t'e above information only> t'e total s'ort-term debt of Higgins %ompany as of t'e De!ember 31> 2.13 balan!e s'eet date is a. E.. b. E2>2$.>.... !. E3>...>.... d. E&>...>....

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,*.

13 ( 22 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition ,,. Fn De!ember 31> 2.14> 1sle %o. 'as E4>...>... of s'ort-term notes payable due on February 14> 2.1$. Fn Kanuary 1.> 2.13> 1sle arranged a line of !redit 0it' 2ea!' 2an+ 0'i!' allo0s 1sle to borro0 up to E3>...>... at one per!ent above t'e prime rate for t'ree years. Fn February 2> 2.1$> 1sle borro0ed E2>4..>... from 2ea!' 2an+ and used E1>...>... additional !as' to li5uidate E3>4..>... 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> 2.14 balan!e s'eet 0'i!' is issued on ?ar!' $> 2.1$ is a. E.. b. E&..>.... !. E1>...>.... d. E1>&..>....

Use t"e $o o*in. in$or-ation $or questions 1?? an# 1?1' #osner %o. is a retail store operating in a state 0it' a (J retail sales tax. T'e retailer may +eep 2J of t'e sales tax !olle!ted. #osner %o. re!ords t'e sales tax in t'e -ales evenue a!!ount. T'e amount re!orded in t'e -ales evenue a!!ount during ?ay 0as E2$1>4$.. 1... T'e amount of sales taxes :to t'e nearest dollar; for ?ay is a. E2.>(&2. b. E1&>4$.. !. E22>&31. d. E1(>&.2. T'e amount of sales taxes payable :to t'e nearest dollar; to t'e state for t'e mont' of ?ay is a. E12>$(3. b. E1&>121. !. E2.>(&2. d. E1(>2$.. 3alley> 1n!.> is a retail store operating in a state 0it' a $J retail sales tax. T'e state la0 provides t'at t'e retail sales tax !olle!ted during t'e mont' must be remitted to t'e state during t'e follo0ing mont'. 1f t'e amount !olle!ted is remitted to t'e state on or before t'e t0entiet' of t'e follo0ing mont'> t'e retailer may +eep 3J of t'e sales tax !olle!ted. Fn )pril 1.> 2.14> 3alley remitted E13$>*.. tax to t'e state tax division for ?ar!' 2.14 retail sales. ='at 0as 3alley4s ?ar!' 2.12 retail sales sub8e!t to sales taxD a. E2>(1&>.... b. E2>&&.>.... !. E2>*..>.... d. E2>(41>&&(. Kump %orporation 'as E2>$..>... of s'ort-term debt it expe!ts to retire 0it' pro!eeds from t'e sale of *$>... s'ares of !ommon sto!+. 1f t'e sto!+ is sold for E2. per s'are subse5uent 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 liabilitiesD a. E1>(..>... b. E2>$..>... !. E*..>... d. E.

1.1.

1.2.

1.3.

%urrent 6iabilities and %ontingen!ies 1.4.

13 ( 23

Elmer %orporation 'as E1>*..>... 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 E2. per s'are subse5uent 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 liabilitiesD a. E1>...>... b. E1>*..>... !. E*..>... d. E. #al!o %o.> 0'i!' 'as a taxable payroll of E,..>...> is sub8e!t to FCT) tax of &.2J and a state !ontribution rate of $.4J. Ho0ever> be!ause of stable employment experien!e> t'e !ompanyBs state rate 'as been redu!ed to 2J. ='at is t'e total amount of federal and state unemployment tax for #al!o %o.D a. E1.4>4.. b. E(3>*.. !. E3&>... d. E2$>2.. oxy %o.> 0'i!' 'as a taxable payroll of E&..>...> is sub8e!t to FCT) tax of &.2J and a state !ontribution rate of $.4J. Ho0ever> be!ause of stable employment experien!e> t'e !ompanyBs state rate 'as been redu!ed to 2J. ='at is t'e total amount of federal and state unemployment tax for oxy %o.D a. E(.>2.. b. E4,>2.. !. E24>... d. E1&>*.. ) !ompany gives ea!' of its $. employees :assume t'ey 0ere all employed !ontinuously t'roug' 2.14 and 2.1$; 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 Kanuary 1 of t'e next year. T'e employees 0or+ * 'ours per day. 1n 2.14> t'ey made E21 per 'our and in 2.1$ t'ey made E24 per 'our. During 2.1$> t'ey too+ an average of , days of va!ation ea!'. T'e !ompanyBs poli!y is to re!ord t'e liability existing at t'e end of ea!' year at t'e 0age rate for t'at year. ='at amount of va!ation liability 0ould be refle!ted on t'e 2.14 and 2.1$ balan!e s'eets> respe!tivelyD a. E1..>*..I E14.>4.. b. E11$>2..I E144>... !. E1..>*..I E144>... d. E11$>2..I E14.>4.. ) !ompany gives ea!' of its $. employees :assume t'ey 0ere all employed !ontinuously t'roug' 2.14 and 2.1$; 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 Kanuary 1 of t'e next year. T'e employees 0or+ * 'ours per day. 1n 2.14> t'ey made E24.$. per 'our and in 2.1$ t'ey made E2* per 'our. During 2.1$> t'ey too+ an average of , days of va!ation ea!'. T'e !ompanyBs poli!y is to re!ord t'e liability existing at t'e end of ea!' year at t'e 0age rate for t'at year. ='at amount of va!ation liability 0ould be refle!ted on t'e 2.14 and 2.1$ balan!e s'eets> respe!tivelyD a. E11(>&..I E1&3>*.. b. E134>4..I E1&*>... !. E11(>&..I E1&*>... d. E134>4..I E1&3>*..

1.$.

1.&.

1.(.

1.*.

13 ( 24 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition 1.,. T'e total payroll of Trolley %ompany for t'e mont' of F!tober> 2.14 0as E*..>...> of 0'i!' E1$.>... represented amounts paid in ex!ess of E1.&>*.. to !ertain employees. E$..>... represented amounts paid to employees in ex!ess of t'e E(>... maximum sub8e!t to unemployment taxes. E1$.>... of federal in!ome taxes and E1$>... of union dues 0ere 0it''eld. T'e state unemployment tax is 1J> t'e federal unemployment tax is . *J> and t'e !urrent F.1.%.). tax is (.&$J on an employeeBs 0ages to E1.&>*.. and 1.4$J in ex!ess of E1.&>*... ='at amount s'ould Trolley re!ord as payroll tax expenseD a. E(2>*... b. E&&>3... !. E$(>3... d. E&1>2...

Use t"e $o o*in. in$or-ation $or questions 11? an# 111' 3an!o %ompany 'as 3$ employees 0'o 0or+ *-'our days and are paid 'ourly. Fn Kanuary 1> 2.13> t'e !ompany began a program of granting its employees 1. days of paid va!ation ea!' year. 3a!ation days earned in 2.13 may first be ta+en on Kanuary 1> 2.14. 1nformation relative to t'ese employees is as follo0s@ Oear 2.13 2.14 2.1$ Hourly =ages E2..$. 22.$. 2$.$. 3a!ation Days Earned by Ea!' Employee 1. 1. 1. 3a!ation Days Csed by Ea!' Employee . * 1.

3an!o '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. 11.. ='at is t'e amount of expense relative to !ompensated absen!es t'at s'ould be reported on 3an!oBs in!ome statement for 2.13D a. E.. b. E(1>4... !. E&3>.... d. E$(>4... 111. ='at is t'e amount of t'e a!!rued liability for !ompensated absen!es t'at s'ould be reported at De!ember 31> 2.1$D a. E*4>.... b. E1,(>4... !. E(1>4... d. E,&>&... Pualpoint pays a 0ee+ly payroll of E1(.>... t'at in!ludes federal taxes 0it''eld of E2$>4..> F1%) taxes 0it''eld of E1$>(*.> and 4.1:+; 0it''oldings of E1*>.... ='at is t'e effe!t of assets and liabilities from t'is transa!tionD a. )ssets de!rease E1(.>... and liabilities do not !'ange. b. )ssets de!rease E12*>*2. and liabilities in!rease E41>1*.. !. )ssets de!rease E12*>*2. and liabilities de!rease E41>1*.. d. )ssets de!rease E11.>*2. and liabilities in!rease E$,>1*..

112.

%urrent 6iabilities and %ontingen!ies 113.

13 ( 25

Pualpoint provides its employees t0o 0ee+s of paid va!ation per year. )s of De!ember 31> &$ employees 'ave earned t0o 0ee+s of va!ation time to be ta+en t'e follo0ing year. 1f t'e average 0ee+ly salary for t'ese employees is E1>14.> 0'at is t'e re5uired 8ournal entryD a. Debit -alaries and =ages Expense for E14*>2.. and !redit -alaries and =ages #ayable for E14*>2... b. "o 8ournal entry re5uired. !. Debit -alaries and =ages #ayable for E14(>&.. and !redit -alaries and =ages Expense for E14(>&... d. Debit -alaries and =ages Expense for E(4>1.. and !redit -alaries and =ages #ayable for E(4>1... -andy -'oes Foot 1n!. is involved in litigation regarding a faulty produ!t sold in a prior year. T'e !ompany 'as !onsulted 0it' its attorney and determined t'at it is possible t'at t'ey may lose t'e !ase. T'e attorneys estimated t'at t'ere is a 4.J !'an!e of losing. 1f t'is is t'e !ase> t'eir attorney estimated t'at t'e amount of any payment 0ould be E$..>.... ='at is t'e re5uired 8ournal entry as a result of t'is litigationD a. Debit 6itigation Expense for E$..>... and !redit 6itigation liability for E$..>.... b. "o 8ournal entry is re5uired. !. Debit 6itigation Expense for E2..>... and !redit 6itigation 6iability for E2..>.... d. Debit 6itigation Expense for E3..>... and !redit 6itigation 6iability for E3..>.... Qtra #ro!esses is involved 0it' innovative approa!'es to finding energy reserves. Qtra re!ently built a fa!ility to extra!t natural gas at a !ost of E1$ million. Ho0ever> Qtra is also legally responsible to remove t'e fa!ility at t'e end of its useful life of t0enty years. T'is !ost is estimated to be E21 million :t'e present value of 0'i!' is E* million;. ='at is t'e 8ournal entry re5uired to re!ord t'e asset retirement obligationD a. "o 8ournal entry re5uired. b. Debit "atural 7as Fa!ility for E21>...>... and !redit )sset etirement Fbligation for E21>...>... !. Debit "atural 7as Fa!ility for E&>...>... and !redit )sset etirement Fbligation for E&>...>.... d. Debit "atural 7as Fa!ility for E*>...>... and !redit )sset etirement Fbligation for E*>...>.... %omposite provides extended servi!e !ontra!ts on ele!troni! e5uipment sold t'roug' ma8or retailers. T'e standard !ontra!t is for four years. During t'e !urrent year> %omposite provided 42>... su!' 0arranty !ontra!ts at an average pri!e of E*1 ea!'. elated to t'ese !ontra!ts> t'e !ompany spent E4..>... servi!ing t'e !ontra!ts during t'e !urrent year and expe!ts to spend E2>1..>... more in t'e future. ='at is t'e net profit t'at t'e !ompany 0ill re!ogni/e in t'e !urrent year related to t'ese !ontra!tsD a. E,.2>.... b. E3>..2>.... !. E4..>.... d. E4$.>$...

114.

11$.

11&.

13 ( 28 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition 11(. Ex!om manufa!tures 'ig'-end 0'ole 'ome ele!troni! systems. T'e !ompany provides a one-year 0arranty for all produ!ts sold. T'e !ompany estimates t'at t'e 0arranty !ost is E22$ per unit sold and reported a liability for estimated 0arranty !osts E(.* million at t'e beginning of t'is year. 1f during t'e !urrent year> t'e !ompany sold &.>... units for a total of E243 million and paid 0arranty !laims of E,>...>... on !urrent and prior year sales> 0'at amount of liability 0ould t'e !ompany report on its balan!e s'eet at t'e end of t'e !urrent yearD :assume a!!rual met'od; a. E2>*..>.... b. E4>$..>.... !. E12>3..>.... d. E13>$..>.... ) !ompany offers a !as' rebate of E1 on ea!' E4 pa!+age of lig't bulbs sold during 2.14. Histori!ally> 1.J of !ustomers mail in t'e rebate form. During 2.14> 3>...>... pa!+ages of lig't bulbs are sold> and 1&.>... E1 rebates are mailed to !ustomers. ='at is t'e rebate expense and liability> respe!tively> s'o0n on t'e 2.14 finan!ial statements dated De!ember 31D a. E3..>...I E3..>... b. E3..>...I E14.>... !. E14.>...I E14.>... d. E1&.>...I E14.>... ) !ompany buys an oil rig for E2>...>... on Kanuary 1> 2.14. 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 E4..>... :present value at 1.J is E1$4>22.;. 1.J is an appropriate interest rate for t'is !ompany. ='at expense s'ould be re!orded for 2.14 as a result of t'ese eventsD a. Depre!iation expense of E24.>... b. Depre!iation expense of E2..>... and interest expense of E1$>422 !. Depre!iation expense of E2..>... and interest expense of E4.>... d. Depre!iation expense of E21$>422 and interest expense of E1$>422 -a0yer %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 E1>$..>... per year. T'e !ompany estimates t'at on average it 0ill in!ur losses of E1>2..>... per year. During 2.14> E$2$>... 0ort' of losses 0ere sustained. Ho0 mu!' total expense and9or loss s'ould be re!ogni/ed by -a0yer %ompany for 2.14D a. E$2$>... in losses and no insuran!e expense b. E$2$>... in losses and E&($>... in insuran!e expense !. E. in losses and E1>2..>... in insuran!e expense d. E. in losses and E1>$..>... in insuran!e expense ) !ompany offers a !as' rebate of E2 on ea!' E& pa!+age of batteries sold during 2.14. Histori!ally> 1.J of !ustomers mail in t'e rebate form. During 2.14> &>...>... pa!+ages of batteries are sold> and 21.>... E2 rebates are mailed to !ustomers. ='at is t'e rebate expense and liability> respe!tively> s'o0n on t'e 2.14 finan!ial statements dated De!ember 31D a. E1>2..>...I E1>2..>... b. E1>2..>...I E(*.>... !. E(*.>...I E(*.>... d. E42.>...I E(*.>...

11*.

11,.

12..

121.

%urrent 6iabilities and %ontingen!ies 122.

13 ( 2<

) !ompany buys an oil rig for E3>...>... on Kanuary 1> 2.14. 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 E&..>... :present value at 1.J is E231>33.;. 1.J is an appropriate interest rate for t'is !ompany. ='at expense s'ould be re!orded for 2.14 as a result of t'ese eventsD a. Depre!iation expense of E3&.>... b. Depre!iation expense of E3..>... and interest expense of E23>133 !. Depre!iation expense of E3..>... and interest expense of E&.>... d. Depre!iation expense of E323>133 and interest expense of E23>133 During 2.13> ao %o. introdu!ed a ne0 line of ma!'ines t'at !arry a t'ree-year 0arranty against manufa!turerBs defe!ts. 2ased on industry experien!e> 0arranty !osts are estimated at 2J of sales in t'e year of sale> 3J in t'e year after sale> and $J in t'e se!ond year after sale. -ales and a!tual 0arranty expenditures for t'e first t'ree-year period 0ere as follo0s@ :assume t'e a!!rual met'od; -ales )!tual =arranty Expenditures 2.13 E 1>&..>... E 3,>... 2.14 2>$..>... &$>... 2.1$ 2>1..>... 13$>... E&>2..>... E23,>... ='at amount s'ould ao report as a liability at De!ember 31> 2.1$D a. E. b. E134>... !. E1.$>... d. E3*1>... #almer Frosted Fla+es %ompany offers its !ustomers a pottery !ereal bo0l if t'ey send in 3 boxtops from #almer Frosted Fla+es boxes and E1. T'e !ompany estimates t'at &.J of t'e boxtops 0ill be redeemed. 1n 2.14> t'e !ompany sold &($>... boxes of Frosted Fla+es and !ustomers redeemed 33.>... boxtops re!eiving 11.>... bo0ls. 1f t'e bo0ls !ost #almer %ompany E3 ea!'> 'o0 mu!' liability for outstanding premiums s'ould be re!orded at t'e end of 2.14D a. E2(.>... b. E$.>... !. E($>... d. E13*>... During 2.13> -alton %o. introdu!ed a ne0 line of ma!'ines t'at !arry a t'ree-year 0arranty against manufa!turerBs defe!ts. 2ased on industry experien!e> 0arranty !osts are estimated at 1J of sales in t'e year of sale> 3J in t'e year after sale> and 4J in t'e se!ond year after sale. -ales and a!tual 0arranty expenditures for t'e first t'ree-year period 0ere as follo0s@ :assume t'e a!!rual met'od; -ales )!tual =arranty Expenditures 2.13 E 1>4..>... E 2&>... 2.14 1>...>... 4.>... 2.1$ 1>4..>... ,.>... E3>*..>... E1$&>... ='at amount s'ould -alton report as a liability at De!ember 31> 2.1$D a. E. b. E14>... !. E22>... d. E14*>...

123.

124.

12$.

13 ( 2= Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition 12&. %rispy Frosted Fla+es %ompany offers its !ustomers a pottery !ereal bo0l if t'ey send in 4 boxtops from %rispy Frosted Fla+es boxes and E1. T'e !ompany estimates t'at &.J of t'e boxtops 0ill be redeemed. 1n 2.14> t'e !ompany sold $..>... boxes of Frosted Fla+es and !ustomers redeemed 22.>... boxtops re!eiving $$>... bo0ls. 1f t'e bo0ls !ost %rispy %ompany E3 ea!'> 'o0 mu!' liability for outstanding premiums s'ould be re!orded at t'e end of 2.14D a. E1$.>... b. E4.>... !. E&.>... d. E*4>...

Use t"e $o o*in. in$or-ation $or questions 12</ 12=/ an# 12>' ?uggs %o. in!ludes one !oupon in ea!' bag of dog food it sells. 1n return for eig't !oupons> !ustomers re!eive a leas'. T'e leas'es !ost ?uggs E3 ea!'. ?uggs estimates t'at 4$ per!ent of t'e !oupons 0ill be redeemed. Data for 2.14 and 2.1$ are as follo0s@ 2ags of dog food sold 6eas'es pur!'ased %oupons redeemed 12(. T'e premium expense for 2.14 is a. E1*(>$... b. E4$>.... !. E($>.... d. E*4>3($. T'e premium liability at De!ember 31> 2.14 is a. E3(>$... b. E$4>.... !. E4$>.... d. E3,>3($. T'e premium liability at De!ember 31> 2.1$ is a. E22>$... b. E3,>3($. !. E4$>.... d. E*4>3($. =ooten %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. =ooten4s la0yer states t'at it is probable t'at =ooten 0ill lose t'e suit and be found liable for a 8udgment !osting =ooten any0'ere from E1>&..>... to E*>...>.... Ho0ever> t'e la0yer states t'at t'e most probable !ost is E4>*..>.... )s a result of t'e above fa!ts> =ooten s'ould a!!rue a. a loss !ontingen!y of E1>&..>... and dis!lose an additional !ontingen!y of up to E&>4..>.... b. a loss !ontingen!y of E4>*..>... and dis!lose an additional !ontingen!y of up to E3>2..>.... !. a loss !ontingen!y of E4>*..>... but not dis!lose any additional !ontingen!y. d. no loss !ontingen!y but dis!lose a !ontingen!y of E1>&..>... to E*>...>.... 2.14 $..>... 1*>... 12.>... 2.1$ &..>... 22>... 1$.>...

12*.

12,.

13..

%urrent 6iabilities and %ontingen!ies 131.

13 ( 2>

Holland %ompany estimates its annual 0arranty expense as 2J of annual net sales. T'e follo0ing data relate to t'e !alendar year 2.14@ "et sales =arranty liability a!!ount 2alan!e> De!. 31> 2.14 2alan!e> De!. 31> 2.14 E1>$..>... E1.>... 2.>... debit before ad8ustment !redit after ad8ustment

='i!' one of t'e follo0ing entries 0as made to re!ord t'e 2.14 estimated 0arranty expenseD:assume t'e a!!rual met'od; a. =arranty Expense .............................................................. 3.>... etained Earnings :prior-period ad8ustment; ............ $>... =arranty 6iability ...................................................... 2$>... b. =arranty Expense .............................................................. 2$>... etained Earnings :prior-period ad8ustment; ...................... $>... =arranty 6iability ...................................................... 3.>... !. =arranty Expense .............................................................. 2.>... =arranty 6iability ...................................................... 2.>... d. =arranty Expense .............................................................. 3.>... =arranty 6iability ...................................................... 3.>... 132. 1n 2.14> #ollard %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 follo0s@ First year of 0arranty 3J -e!ond year of 0arranty $J -ales and a!tual 0arranty expenditures for 2.14 and 2.1$ are presented belo0@ 2.14 2.1$ -ales E$..>... E(..>... )!tual 0arranty expenditures 3.>... $.>... ='at is t'e estimated 0arranty liability at t'e end of 2.1$D:assume t'e a!!rual met'od; a. E1&>.... b. E&4>.... !. E,&>.... d. E2.>.... 133. Fn Kanuary 3> 2.14> 2enton %orp. o0ned a ma!'ine t'at 'ad !ost E3..>.... T'e a!!umulated depre!iation 0as E1*.>...> estimated salvage value 0as E1*>...> and fair value 0as E4*.>.... Fn Kanuary 4> 2.14> t'is ma!'ine 0as irreparably damaged by #ogo %orp. and be!ame 0ort'less. 1n F!tober 2.14> a !ourt a0arded damages of E4*.>... against #ogo in favor of 2enton. )t De!ember 31> 2.14> t'e final out!ome of t'is !ase 0as a0aiting appeal and 0as> t'erefore> un!ertain. Ho0ever> in t'e opinion of 2entonBs attorney> #ogoBs appeal 0ill be denied. )t De!ember 31> 2.14> 0'at amount s'ould 2enton a!!rue for t'is gain !ontingen!yD a. E4*.>.... b. E3,.>.... !. E3..>.... d. E..

13 ( 3? Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition 134. Flavor 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 Flavor. T'e gro!ers are reimbursed 0'en t'ey send t'e !oupons to Flavor. 1n Flavor4s experien!e> $.J of su!' !oupons are redeemed> and generally one mont' elapses bet0een t'e date a gro!er re!eives a !oupon from a !onsumer and t'e date Flavor re!eives it. During 2.14 Flavor issued t0o separate series of !oupons as follo0s@ %onsumer )mount Disbursed 1ssued Fn Total 3alue Expiration Date as of 12931914 191914 E$..>... &93.914 E23&>... (91914 (2.>... 12931914 3..>... T'e only 8ournal entry re!orded to date is@ debit to !oupon expense and !redit to !as' of E(1$>.... T'e De!ember 31> 2.14 balan!e s'eet s'ould in!lude a liability for unredeemed !oupons of@ a. E.. b. E&.>.... !. E124>.... d. E3&.>.... #resented belo0 is information available for ?arley %ompany. %urrent )ssets %as' E 4>... -'ort-term investments &$>... )!!ounts re!eivable &1>... 1nventory 11.>... #repaid expenses 3.>... Total !urrent assets E2(.>... Total !urrent liabilities are E1..>.... T'e a!id-test ratio for ?arley is@ a. 2.*. to 1 b. 2.4. to 1 !. 1.3. to 1 d. ..&, to 1

13$.

+u ti& e C"oi%e Ans*ers)Co-&utationa

IteAns' IteAns' IteAns' IteAns' IteAns' IteAns' IteAns'

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

b d a d b ! b

,(. ,*. ,,. 1... 1.1. 1.2. 1.3.

d b d b b ! a

1.4. 1.$. 1.&. 1.(. 1.*. 1.,. 11..

a d d ! ! ! d

111. 112. 113. 114. 11$. 11&. 11(.

a d a b d d !

11*. 11,. 12.. 121. 122. 123. 124.

b d a b d d b

12$. 12&. 12(. 12*. 12,. 13.. 131.

d b d d d b d

132. 133. 134. 13$.

a d b !

%urrent 6iabilities and %ontingen!ies

13 ( 31

+ULTIPLE CHOICE)CPA A#a&te#

13&. ='i!' of t'e follo0ing is generally asso!iated 0it' payables !lassified as a!!ounts payableD #eriodi! #ayment -e!ured of 1nterest by %ollateral a. "o "o b. "o Oes !. Oes "o d. Oes Oes Fn Kanuary 1> 2.12> 2a!on %o. leased a building to Horner %orp. for a ten-year term at an annual rental of E14.>.... )t in!eption of t'e lease> 2a!on re!eived E$&.>... !overing t'e first t0o years4 rent of E2*.>... and a se!urity deposit of E2*.>.... T'is deposit 0ill not be returned to Horner upon expiration of t'e lease but 0ill be applied to payment of rent for t'e last t0o years of t'e lease. ='at portion of t'e E$&.>... s'ould be s'o0n as a !urrent and long-term liability> respe!tively> in 2a!on4s De!ember 31> 2.12 balan!e s'eetD %urrent 6iability 6ong-term 6iability a. E. E$&.>... b. E14.>... E2*.>... !. E2*.>... E2*.>... d. E2*.>... E14.>... Fn -eptember 1> 2.14> Halley %o. issued a note payable to Fidelity 2an+ in t'e amount of E1>*..>...> bearing interest at 1.J> and payable in t'ree e5ual annual prin!ipal payments of E&..>.... Fn t'is date> t'e ban+4s prime rate 0as 11J. T'e first payment for interest and prin!ipal 0as made on -eptember 1> 2.1$. )t De!ember 31> 2.1$> Halley s'ould re!ord a!!rued interest payable of a. E&&>.... b. E&.>.... !. E4.>.... d. E132>.... 1n!luded in 3ernon %orp.4s liability a!!ount balan!es at De!ember 31> 2.14> 0ere t'e follo0ing@ (J note payable issued F!tober 1> 2.14> maturing -eptember 3.> 2.1$ *J note payable issued )pril 1> 2.14> payable in six e5ual annual installments of E1$.>... beginning )pril 1> 2.1$ E2$.>... &..>...

13(.

13*.

13,.

3ernon4s De!ember 31> 2.14 finan!ial statements 0ere issued on ?ar!' 31> 2.1$. Fn Kanuary 1$> 2.1$> t'e entire E&..>... balan!e of t'e *J note 0as refinan!ed by issuan!e of a long-term obligation payable in a lump sum. 1n addition> on ?ar!' 1.> 2.1$> 3ernon !onsummated a non!an!elable agreement 0it' t'e lender to refinan!e t'e (J> E2$.>... note on a long-term basis> on readily determinable terms t'at 'ave not yet been implemented. Fn t'e De!ember 31> 2.14 balan!e s'eet> t'e amount of t'e notes payable t'at 3ernon s'ould !lassify as s'ort-term obligations is a. E1($>.... b. E12$>.... !. E$.>.... d. E..

13 ( 32 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition 14.. Ebbert %ompanyBs salaried employees are paid bi0ee+ly. F!!asionally> advan!es made to employees are paid ba!+ by payroll dedu!tions. 1nformation relating to salaries for t'e !alendar year 2.1$ is as follo0s@ 12931914 1293191$ Employee advan!es E24>... E 3&>... )!!rued salaries payable 14.>... D -alaries expense during t'e year 1>4..>... -alaries paid during t'e year :gross; 1>2$.>... )t De!ember 31> 2.1$> 0'at amount s'ould Ebbert report for a!!rued salaries payableD a. E2,.>.... b. E1&2>.... !. E114>.... d. E1$.>.... 141. oasten %orp.4s payroll for t'e pay period ended F!tober 31> 2.14 is summari/ed as follo0s@ Department Total #ayroll =ages Fa!tory E ($>... -ales 22>... Fffi!e 1*>... E11$>... Federal 1n!ome Tax =it''eld E ,>... 3>... 2>... E14>... )mount of =ages -ub8e!t to #ayroll Taxes F.1.%.). Cnemployment E(.>... E32>... 1&>... 2>... *>... G E,4>... E34>...

)ssume t'e follo0ing payroll tax rates@ F.1.%.). for employer and employee (J ea!' Cnemployment 3J ='at amount s'ould oasten a!!rue as its s'are of payroll taxes in its F!tober 31> 2.14 balan!e s'eetD a. E21>&... b. E1$>.2.. !. E14>1*.. d. E(>&... 142. Ourman %o. sells ma8or 'ouse'old applian!e servi!e !ontra!ts for !as'. T'e servi!e !ontra!ts are for a one-year> t0o-year> or t'ree-year period. %as' re!eipts from !ontra!ts are !redited to unearned servi!e !ontra!t revenues. T'is a!!ount 'ad a balan!e of E(2.>... at De!ember 31> 2.13 before year-end ad8ustment. -ervi!e !ontra!t !osts are !'arged as in!urred to t'e servi!e !ontra!t expense a!!ount> 0'i!' 'ad a balan!e of E1*.>... at De!ember 31> 2.13. Futstanding servi!e !ontra!ts at De!ember 31> 2.13 expire as follo0s@ During 2.14 During 2.1$ During 2.1& E1$.>... E24.>... E1.$>... ='at amount s'ould be reported as unearned servi!e !ontra!t revenues in Ourman4s De!ember 31> 2.13 balan!e s'eetD a. E$4.>.... b. E4,$>.... !. E3&.>.... d. E33.>....

%urrent 6iabilities and %ontingen!ies 143.

13 ( 33

%ore 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. %ore4s past experien!e indi!ates t'at only ($J of t'e stamps sold to li!ensees 0ill be redeemed. %ore4s liability for stamp redemptions 0as E$>...>... at De!ember 31> 2.13. )dditional information for 2.14 is as follo0s@ -tamp servi!e revenue from stamps sold to li!ensees %ost of redemptions E4>...>... 3>32.>...

1f all t'e stamps sold in 2.14 0ere presented for redemption in 2.1$> t'e redemption !ost 0ould be E3>...>.... ='at amount s'ould %ore report as a liability for stamp redemptions at De!ember 31> 2.14D a. E*>32.>.... b. E$>&*.>.... !. E3>,3.>.... d. E4>&*.>.... 144. "eer %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. During 2.14> Eaton %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 2J 0it'in 12 mont's follo0ing sale and 3J in t'e se!ond 12 mont's follo0ing sale. -ales and a!tual 0arranty expenditures for t'e years ended De!ember 31> 2.14 and 2.1$ are as follo0s@ )!tual =arranty -ales Expenditures 2.14 E *..>... E12>... 2.1$ 1>...>... 3$>... E1>*..>... E4(>... )t De!ember 31> 2.1$> :assuming t'e a!!rual met'od; Eaton s'ould report an estimated 0arranty liability of a. E.. b. E1$>.... !. E3$>.... d. E43>.... 14&. 1n ?ar!' 2.1$> an explosion o!!urred at <ir+ %o.4s plant> !ausing damage to area properties. 2y ?ay 2.1$> no !laims 'ad yet been asserted against <ir+. Ho0ever> <ir+4s management and legal !ounsel !on!luded t'at it 0as reasonably possible t'at <ir+ 0ould be 'eld responsible for negligen!e> and t'at E4>...>... 0ould be a reasonable estimate of t'e damages. <ir+4s E$>...>... !ompre'ensive publi! liability poli!y !ontains a E4..>... dedu!tible !lause. 1n <ir+4s De!ember 31> 2.14 finan!ial statements> for 0'i!' t'e auditor4s field0or+ 0as !ompleted in )pril 2.1$> 'o0 s'ould t'is !asualty be reportedD a. )s a note dis!losing a possible liability of E4>...>.... b. )s an a!!rued liability of E4..>.... !. )s a note dis!losing a possible liability of E4..>.... d. "o note dis!losure of a!!rual is re5uired for 2.14 be!ause t'e event o!!urred in 2.1$.

14$.

13 ( 34 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition

+u ti& e C"oi%e Ans*ers)CPA A#a&te#

IteAns' IteAns' IteAns' IteAns' IteAns' IteAns'

13&. 13(.

a b

13*. 13,.

! d

14.. 141.

a d

142. 143.

b !

144. 14$.

d d

14&.

DERI7ATIONS ) Co-&utationa
No' Ans*er
,.. ,1. ,2. ,3. ,4. ,$. ,&. ,(. ,*. ,,. 1... 1.1. 1.2. 1.3. 1.4. 1.$. 1.&. 1.(. 1.*. b d a d b ! b d b d b b ! a a d d ! !

Derivation
E2$3>,.. R E2$.>... A E3>,... E3>,.. S 293 A E2>&... E21>... T :E3..>... R E21>...; A ...($3 A (.$3J. :E13>3.. S .,,; A E13>1&(. E32.>... S .12 S ,912 A E2*>*... :E3&.>... R E3$.>...; S 39$ A E&>.... E1>&..>.... :&>... S E12$; S $912 A E312>$... E22$>... S ..& A E13>$... E2>2$.>.... E4>...>... R E2>4..>... A E1>&..>.... - U ..(- A E2$1>4$.> - A E23$>.... E2$1>4$. R E23$>... A E1&>4$.. E1&>4$. S .,* A E1&>121. ..$- S .,( A E13$>*..> - A E2>*..>.... *$>... S E2. A E1>(..>.... $.>... S E2. A E1>...>.... V:..&2 R ..$4; U ..2W S E,..>... A E2$>2... V:..&2 R ..$4; U ..2W S E&..>... A E1&>*... $. S 12 S * S E21 A E1..>*..I $. S 1$ S * S E24 A E144>.... $. S 12 S * S E24.$. A E11(>&..I $. S 1$ S * S E2* A E1&*>....

%urrent 6iabilities and %ontingen!ies

13 ( 35

DERI7ATIONS ) Co-&utationa 0%ont'1

No' Ans*er
1.,. 11.. 111. 112. 113. 114. 11$. 11&. 11(. 11*. 11,. 12.. 121. 122. 123. 124. 12$. 12&. 12(. 12*. 12,. 13.. 131. ! d a d a b d d ! b d a b d d b d b d d d b d

Derivation
:E&$.>... S (.&$J; U :E1$.>... S 1.4$J; U :E3..>... S 1.*J; A E$(>3... E2..$. S * S 1. S 3$ A E$(>4... :E2$.$. S * S 1. S 3$; U :E22.$. S * S 2 S 3$; A E*4>.... E2$>4.. U E1$>(*. U E1*>... A E$,>1*.I E1(.>... R E$,>1*. A E11.>*2.. &$ S 2 0ee+s S E1>14.90ee+ A E14*>2... 6i+eli'ood of loss is only possible> not probable. #resent value of t'e removal !ost.

V:42>... S E*1; 4 yrs.W R E4..>... A E4$.>$...

E(>*..>... U :&.>... S E22$; R E,>...>... A E12>3..>.... 3>...>... S .1. S E1 A E3..>...I E3..>... R E1&.>... A E14.>.... :E2>...>... U E1$4>22.; T 1. A E21$>422I E1$4>22. S .1. A E1$>422. E$2$>... losses and no insuran!e expense &>...>... S .1. S E2 A E1>2..>...I E1>2..>... R E42.>... A E(*.>.... :E3>...>... U E231>33.; T 1. A E323>133I E231>33. S .1. A E23>133. :E&>2..>... S .1.; R E23,>... A E3*1>.... XV:&($>... S .&.; R 33.>...W T 3Y S E2 A E$.>.... :E3>*..>... S ..*; R E1$&>... A E14*>.... XV:$..>... S .&.; R 22.>...W T 4Y S E2 A E4.>.... V:$..>... S .4$; T *W S E3 A E*4>3($. V:22$>... R 12.>...; T *W S E3 A E3,>3($. XV:&..>... S .4$; R 1$.>...W T *Y S E3 A E4$>.... E4$>... U E3,>3($ A E*4>3($. E4>*..>... and E3>2..>.... E1>$..>... S ..2 A E3.>....

13 ( 38 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition

DERI7ATIONS ) Co-&utationa 0%ont'1

No' Ans*er
132. 133. 134. 13$. a d b ! V:E$..>... U E(..>...; S ..*W R E*.>... A E1&>.... E.> gain !ontingen!ies are not a!!rued. :E(2.>... S .$; R E3..>... A E&.>.... E4>... U E&$>... U E&1>... GGGGGGGGGGGGG A 1.3. to 1. E1..>...

Derivation

DERI7ATIONS ) CPA A#a&te#

No' Ans*er
13&. 13(. 13*. 13,. 14.. 141. 142. 143. 144. 14$. 14&. a b ! d a d b ! d d ! %on!eptualGa!!ounts payable generally are /ero-interest-bearing and unse!ured. E14.>... and E2*.>.... E1>2..>... S .1. S 4 A E4.>.... 12

Derivation

%on!eptualGbot' notes 'ave been refinan!ed by long-term obligations. E1>4..>... U E14.>... R E1>2$.>... A E2,.>.... :E,4>... S ..(; U :E34>... S ..3; A E(>&... E1$.>... U E24.>... U E1.$>... A E4,$>.... :E3>...>... S .($; U E$>...>... R E3>32.>... A E3>,3.>.... %on!eptual. :E1>*..>... S ..$; R E4(>... A E43>.... %on!eptual.

%urrent 6iabilities and %ontingen!ies

13 ( 3<

BRIEF E3ERCISES
BE' 13(14<G"otes payable. Fn )ugust 31> 6atty %o. partially refunded E4$.>... of its outstanding 1.J note payable made one year ago to Dugan -tate 2an+ by paying E4$.>... plus E4$>... interest> 'aving obtained t'e E4,$>... by using E131>... !as' and signing a ne0 one-year E4..>... note dis!ounted at ,J by t'e ban+. Instru%tions :1; ?a+e t'e entry to re!ord t'e partial refunding. )ssume 6atty %o. ma+es reversing entries 0'en appropriate. :2; #repare t'e ad8usting entry at De!ember 31> assuming straig't-line amorti/ation of t'e dis!ount.

So ution 13(14< :1; "otes #ayable........................................................................... 1nterest Expense........................................................................ Dis!ount on "otes #ayable :,J S E4..>...;............................ "otes #ayable................................................................ %as'.............................................................................. :2; 1nterest Expense :193 S E3&>...;.............................................. Dis!ount on "otes #ayable............................................ 4$.>... 4$>... 3&>...

4..>... 131>... 12>...

12>...

BE' 13(14=G#ayroll entries. Total payroll of =alnut %o. 0as E1>*4.>...> of 0'i!' E32.>... represented amounts paid in ex!ess of E1.&>*.. to !ertain employees. T'e amount paid to employees in ex!ess of E(>... 0as E1>44.>.... 1n!ome taxes 0it''eld 0ere E4$.>.... T'e state unemployment tax is 1.2J> t'e federal unemployment tax is .*J> and t'e F.1.%.). tax is (.&$J on an employeeBs salaries and 0ages to E1.&>*.. and 1.4$J in ex!ess of E1.&>*... Instru%tions :a; #repare t'e 8ournal entry for t'e salaries and 0ages paid. :b; #repare t'e entry to re!ord t'e employer payroll taxes.

So ution 13(14= :a; -alaries and =ages Expense.................................................... 1>*4.>... =it''olding Taxes #ayable............................................ F1%) Taxes #ayable...................................................... %as'.............................................................................. L V:E1>*4.>... R E32.>...; S (.&$JW U :E32.>... S 1.4$J; 4$.>... 12.>,2.L 1>2&,>.*.

13 ( 3= Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition So ution 13(14= :!ont.; :b; #ayroll Tax Expense ............................................................... F1%) Taxes #ayable :E1>$2.>... S (.&$J; U :E32.>... S 1.4$J;........... FCT) Taxes #ayable V:E1>*4.>... R E1>44.>...; S .*JW .......................... -CT) Taxes #ayable :E4..>... S 1.2J; ..................... 12*>,2. 12.>,2. 3>2.. 4>*..

E3ERCISES
E@' 13(14>G%ompensated absen!es. -no0 %o. began operations on Kanuary 2> 2.14. 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 Kanuary 1. of t'e year follo0ing t'e year in 0'i!' t'ey are earned. T'e average 'ourly 0age rate 0as E2.... in 2.14 and E21.2$ in 2.1$. T'e average va!ation days used by ea!' employee in 2.1$ 0as ,. -no0 %o. a!!rues t'e !ost of !ompensated absen!es at rates of pay in effe!t 0'en earned. Instru%tions #repare 8ournal entries to re!ord t'e transa!tions related to paid va!ation days during 2.14 and 2.1$.

So ution 13(14> 2.14 -alaries and =ages Expense.............................................. 24>... :1; -alaries and =ages #ayable................................... :1; 1$ S * S E2.... A E2>4..I E2>4.. S 1. A E24>.... 2.1$ -alaries and =ages Expense.............................................. 1>3$. -alaries and =ages #ayable............................................... 21>&.. :2; %as'......................................................................... -alaries and =ages Expense.............................................. 2$>$.. :4; -alaries and =ages #ayable................................... :2; E2>4.. S , A E21>&... :3; 1$ * E21.2$ A E2>$$.I E2>$$. , A E22>,$.. :4; E2>$$. 1. A E2$>$... 24>...

22>,$. :3; 2$>$..

E@' 13(15?G%ontingent liabilities. 2elo0 are t'ree independent situations. 1. 1n )ugust> 2.14 a 0or+er 0as in8ured in t'e fa!tory in an a!!ident partially t'e result of 'is o0n negligen!e. T'e 0or+er 'as sued 2ar+ley %o. for E*..>.... %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 E2$.>... to E$..>....

%urrent 6iabilities and %ontingen!ies E@' 13(15? :!ont.;

13 ( 3>

2. ) suit for brea!' of !ontra!t see+ing damages of E2>4..>... 0as filed by an aut'or against Henderson %o. on F!tober 4> 2.14. Henderson4s legal !ounsel believes t'at an unfavorable out!ome is probable. ) reasonable estimate of t'e a0ard to t'e plaintiff is bet0een E*..>... and E1>*..>.... "o amount 0it'in t'is range is a better estimate of potential damages t'an any ot'er amount. 3. <roft is involved in a pending !ourt !ase. <roftBs la0yers believe it is probable t'at <roft 0ill be a0arded damages of E1>...>.... Instru%tions Dis!uss t'e proper a!!ounting treatment> in!luding any re5uired dis!losures> for ea!' situation. 7ive t'e rationale for your ans0ers.

So ution 13(15? 1. 2ar+ley %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 E*..>.... Henderson %o. s'ould dis!lose t'e follo0ing in t'e notes to t'e finan!ial statements@ 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. <roft s'ould not re!ord t'e gain !ontingen!y until itBs reali/ed. Csually> gain !ontingen!ies are neit'er a!!rued nor dis!losed. T'e E1>...>... 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(151G#remiums. 1r0in ?usi! -'op gives its !ustomers !oupons redeemable for a poster plus a 2o Diddley %D. Fne !oupon is issued for ea!' dollar of sales. Fn t'e surrender of 1.. !oupons and E$... !as'> t'e poster and %D are given to t'e !ustomer. 1t is estimated t'at *.J of t'e !oupons 0ill be presented for redemption. -ales for t'e first period 0ere E(..>...> and t'e !oupons redeemed totaled 42.>.... -ales for t'e se!ond period 0ere E*4.>...> and t'e !oupons redeemed totaled ($.>.... 1r0in ?usi! -'op boug't 2.>... posters at E2...9poster and 2.>... %Ds at E&...9%D. Instru%tions #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 ( 4? Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition E@' 13(151 :!ont.; Entry #eriod 1 #eriod 2

:a; To re!ord !oupons redeemed GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG :b; To re!ord estimated liability GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG

So ution 13(151 Entry #eriod 1 #eriod 2 :a; #remium 6iability 4>2.. #remium Expense V:42.>... T 1..; S :E*... R E$;W 12>&.. 1*>3.. %as' :42.>... T 1..; S E$ 21>... 3(>$.. 1nventory of #remiums 33>&.. &.>... GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG :b; #remium Expense #remium 6iability LV:(..>... S .*.; R 42.>...W T 1.. S E3... 4>2..L 4>2.. 1>*&. 1>*&.

E@' 13(152G#remiums. -terling %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 E1.$. ea!'. -terling4s experien!e indi!ates t'at &. per!ent of t'e !oupons 0ill be redeemed. During 2.14> 1..>... bags of dog food 0ere sold> 12>... toys 0ere pur!'ased> and 4.>... !oupons 0ere redeemed. During 2.1$> 12.>... bags of dog food 0ere sold> 1&>... toys 0ere pur!'ased> and &.>... !oupons 0ere redeemed. Instru%tions Determine t'e premium expense to be reported in t'e in!ome statement and t'e premium liability on t'e balan!e s'eet for 2.14 and 2.1$.

So ution 13(152 #remium expense #remium liability :1; :2; :3; :4; 2.14 E22>$.. :1; (>$.. :2; 2.1$ E2(>... :3; 12>... :4;

1..>... S .& A &.>...I &.>... T 4 A 1$>...I 1$>... S E1.$. A E22>$... 4.>... T 4 A 1.>...I 1$>... R 1.>... A $>...I $>... S E1.$. A E(>$... 12.>... S .& A (2>...I (2>... T 4 A 1*>...I 1*>... S E1.$. A E2(>.... &.>... T 4 A 1$>...I $>... U 1*>... R 1$>... A *>...I *>... S E1.$. A E12>....

%urrent 6iabilities and %ontingen!ies

13 ( 41

PROBLE+S
Pr' 13(153G)!!ounts and "otes #ayable. Des!ribed belo0 are !ertain transa!tions of 6amar %ompany for 2.14@ 1. Fn ?ay 1.> t'e !ompany pur!'ased goods from Fox %ompany for E($>...> terms 291.> n93.. #ur!'ases and a!!ounts payable are re!orded at net amounts. T'e invoi!e 0as paid on ?ay 1*. Fn Kune 1> t'e !ompany pur!'ased e5uipment for E,.>... from E3.>... in !as' and giving a one-year> ,J note for t'e balan!e. ao %ompany> paying

2. 3.

Fn -eptember 3.> t'e !ompany dis!ounted at 1.J its E2..>...> one-year /ero-interestbearing note at 3irginia -tate 2an+.

Instru%tions :a; #repare t'e 8ournal entries ne!essary to re!ord t'e transa!tions above using appropriate dates. :b; #repare t'e ad8usting entries ne!essary at De!ember 31> 2.14 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 6iabilities se!tion of 6amar %ompany4s De!ember 31> 2.14 balan!e s'eet. So ution 13(153 :a; ?ay 1.> 2.14 #ur!'ases91nventory.................................................................. )!!ounts #ayable.......................................................... ?ay 1*> 2.14 )!!ounts #ayable...................................................................... %as'.............................................................................. Kune 1> 2.14 E5uipment................................................................................. %as'.............................................................................. "otes #ayable................................................................ -eptember 3.> 2.14 %as'.......................................................................................... Dis!ount on "otes #ayable....................................................... "otes #ayable................................................................ :b; 1nterest Expense........................................................................ 1nterest #ayable :E&.>... S .., S (912;......................... 1nterest Expense........................................................................ Dis!ount on "otes #ayable :E2.>... S 3912;................. :!; %urrent 6iabilities 1nterest payable "ote payableG ao %ompany "ote payableG3irginia -tate 2an+ 6ess@ Dis!ount on note (3>$..

(3>$..

(3>$..

(3>$..

,.>...

3.>... &.>...

1*.>... 2.>... 3>1$. $>...

2..>... 3>1$. $>... E 3>1$. &.>...

E2..>... 1$>...

1*$>... E24*>1$.

13 ( 42 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition Pr' 13(154G efinan!ing of s'ort-term debt. )t t'e finan!ial statement date of De!ember 31> 2.14> t'e liabilities outstanding of #ollard %orporation in!luded t'e follo0ing@ 1. 2. 3. 4. %as' dividends on !ommon sto!+> E4.>...> payable on Kanuary 1$> 2.1$. "ote payable to =abaso -tate 2an+> E4(.>...> due Kanuary 2.> 2.1$. -erial bonds> E1>4..>...> of 0'i!' E3$.>... mature during 2.1$. "ote payable to Frlando "ational 2an+> E3..>...> due Kanuary 2(> 2.1$.

T'e follo0ing transa!tions o!!urred early in 2.1$@ Kanuary 1$@ T'e !as' dividends on !ommon sto!+ 0ere paid. Kanuary 2.@ T'e note payable to =abaso -tate 2an+ 0as paid. Kanuary 2$@ T'e !orporation entered into a finan!ing agreement 0it' =abaso -tate 2an+> enabling it to borro0 up to E$..>... at any time t'roug' t'e end of 2.1(. )mounts borro0ed under t'e agreement 0ould bear interest at 1J 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 E4..>... to repla!e t'e !as' used in paying its Kanuary 2. note to t'e ban+. Kanuary 2&@ 4.>... s'ares of !ommon sto!+ 0ere issued for E3$.>.... E3..>... of t'e pro!eeds 0as used to li5uidate t'e note payable to Frlando "ational 2an+. February 1@ T'e finan!ial statements for 2.14 0ere issued. Instru%tions #repare a partial balan!e s'eet for #ollard %orporation> s'o0ing t'e manner in 0'i!' t'e above liabilities s'ould be presented at De!ember 31> 2.14. T'e liabilities s'ould be properly !lassified bet0een !urrent and long-term> and appropriate note dis!losure s'ould be in!luded. So ution 13(154 %urrent liabilities@ Dividends payable "otes payableG =abaso -tate 2an+ %urrently maturing portion of serial bonds Total !urrent liabilities 6ong-term debt@ "ote payableGFrlando "ational 2an+> refinan!ed in Kanuary> 2.1$G"ote 1 -erial bonds not maturing !urrently Total long-term debt Total liabilities E 4.>... 4(.>... 3$.>...

E *&.>...

3..>... 1>.$.>...

1>3$.>... E2>21.>...

"ote 1@ Fn Kanuary 2&> 2.1$> t'e !orporation issued 4.>... s'ares of !ommon sto!+ and re!eived pro!eeds totaling E3$.>...> of 0'i!' E3..>... 0as used to li5uidate a note payable t'at matured on Kanuary 2(> 2.1$. )!!ordingly> su!' note payable 'as been !lassified as long-term debt at De!ember 31> 2.14.

%urrent 6iabilities and %ontingen!ies Pr' 13(155G#remiums.

13 ( 43

<ane %andy %ompany offers a !offee mug as a premium for every ten E1 !andy bar 0rappers presented by !ustomers toget'er 0it' E2. T'e pur!'ase pri!e of ea!' mug to t'e !ompany is E1.*.I in addition it !osts E1.2. to mail ea!' mug. T'e results of t'e premium plan for t'e years 2.14 and 2.1$ are as follo0s :assume all pur!'ases and sales are for !as';@ 2.14 2.1$ %offee mugs pur!'ased (2.>... *..>... %andy bars sold $>&..>... &>($.>... =rappers redeemed 2>*..>... 4>2..>... 2.14 0rappers expe!ted to be redeemed in 2.1$ 2>...>... 2.1$ 0rappers expe!ted to be redeemed in 2.1& 2>(..>... Instru%tions :a; #repare t'e general 8ournal entries t'at s'ould be made in 2.14 and 2.1$ related to t'e above plan by <ane %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 <ane %andy %ompany balan!e s'eet and in!ome statement at t'e end of 2.14 and 2.1$. So ution 13(155 :a; 2.14 1nventory of #remiums..................................................................... 1>2,&>... %as'.................................................................................... :(2.>... S E1.*. A E1>2,&>...; %as'................................................................................................ $>&..>... -ales evenue.................................................................... :$>&..>... S E1 A E$>&..>...; %as'................................................................................................ 224>... #remium Expense........................................................................... 2*.>... 1nventory of #remiums......................................................... V2>*..>... T 1. A 2*.>... S :E2... R E1.2.; A E224>... 2*.>... S E1.*. A E$.4>...W #remium Expense........................................................................... #remiums 6iability ............................................................... :2>...>... T 1. A 2..>... S E1 A E2..>...; 2..>...

1>2,&>...

$>&..>...

$.4>...

2..>...

2.1$ 1nventory of #remiums..................................................................... 1>44.>... %as' ................................................................................... :*..>... S E1.*. A E1>44.>...; %as'................................................................................................ &>($.>... -ales evenue.................................................................... :&>($.>... S E1 A E&>($.>...;

1>44.>...

&>($.>...

13 ( 44 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition So ution 13(155 :!ont.; %as'................................................................................................ 33&>... #remium 6iability............................................................................. 2..>... #remium Expense........................................................................... 22.>... 1nventory of #remium........................................................... V4>2..>... T 1. A 42.>... S :E2... R E1.2.; A E33&>... 42.>... S E1.*. A E($&>...W #remium Expense........................................................................... #remium 6iability................................................................. :2>(..>... T 1. A 2(.>... S E1 A E2(.>...; :b; 2alan!e -'eet "ame 1nventory of #remiums #remium 6iability 1n!ome -tatement "ame #remium Expense Pr' 13(158G=arranties. ?erritt E5uipment %ompany sells !omputers for E1>$.. ea!' and also gives ea!' !ustomer a 2year 0arranty t'at re5uires t'e !ompany to perform periodi! servi!es and to repla!e defe!tive parts. During 2.14> t'e !ompany sold ,.. !omputers. 2ased on past experien!e> t'e !ompany 'as estimated t'e total 2-year 0arranty !osts as E4. for parts and E&. for labor. :)ssume sales all o!!ur at De!ember 31> 2.14.; 1n 2.1$> ?erritt in!urred a!tual 0arranty !osts relative to 2.14 !omputer sales of E12>... for parts and E1*>... for labor. Instru%tions :a; Cnder t'e expense 0arranty approa!'> give t'e entries to refle!t t'e above transa!tions :a!!rual met'od; for 2.14 and 2.1$. :b; Cnder t'e !as'-basis met'od> 0'at are t'e =arranty Expense balan!es for 2.14 and 2.1$D :!; T'e transa!tions of part :a; !reate 0'at balan!e under !urrent liabilities in t'e 2.14 balan!e s'eetD So ution 13(158 :a; 2.14 )!!ounts e!eivable....................................................................... 1>3$.>... -ales evenue.................................................................... =arranty Expense........................................................................... =arranty 6iability ................................................................ 2.1$ ,.>... %lass Fperating Expense 2.14 E4*.>... 2.1$ E4,.>... %lass %urrent )sset %urrent 6iability 2.14 E(,2>... 2..>... 2.1$ E1>4(&>... 2(.>... 2(.>...

($&>...

2(.>...

1>3$.>... ,.>...

%urrent 6iabilities and %ontingen!ies So ution 13(158 :!ont.; =arranty 6iability............................................................................. 1nventory.............................................................................. %as'> 1nventory> )!!rued #ayroll......................................... :b; :!; 2.14 2.1$ 2.14 E.. E3.>.... %urrent 6iabilitiesG=arranty 6iability E4$>.... :T'e remainder of t'e E,.>... liability is a long-term liability.; 3.>...

13 ( 45

12>... 1*>...

IFRS :UESTIONS
True A Fa se :uestions 1. -'ort-term debt obligations are !lassified as !urrent liabilities unless an agreement to refinan!e is !ompleted before t'e finan!ial statements are issued. 2. For purposes of re!ogni/ing a provision MprobableN is defined as more li+ely t'an not 3. ) provision differs from ot'er liabilities in t'at t'ere is greater un!ertainty about t'e timing and amount of settlement. 4. 1F - allo0s for redu!ed dis!losure of !ontingent liabilities if t'e dis!losure !ould in!rease t'e !ompanyZs !'an!e of losing a la0suit. $. %ontingent liabilities are not reported in t'e finan!ial statements but may be dis!losed in t'e notes to t'e finan!ial statements if t'e li+eli'ood of an unfavorable out!ome is possible. &. ) !ompany !an ex!lude a s'ort-term obligation from !urrent liabilities if it intends to refinan!e t'e obligation and 'as an un!onditional rig't to defer settlement of t'e obligation for at least 12 mont's follo0ing t'e due date. (. #rovisions are only re!orded if it is li+ely t'at t'e !ompany 0ill 'ave to settle an obligation at some point in t'e future. *. )n onerous !ontra!t is one in 0'i!' t'e unavoidable !osts of satisfying t'e obligations out0eig' t'e e!onomi! benefits to be re!eived. ,. %ontingent assets are not reported in t'e statement of finan!ial position. 1.. 1F - uses t'e term M!ontingentN for assets and liabilities not re!ogni/ed in t'e finan!ial statement. Ans*ers to True A Fa seB 1. False 2. True 3. True 4. False $. True &. False (. False *. True ,. True 1.. True

13 ( 48 Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition +u ti& e C"oi%eB 11. Cnder 1F -> 0'i!' of t'e follo0ing is used to measure a liability> if a range of estimates is predi!ted and no amount in t'e range is more li+ely t'an any ot'er amount in t'e rangeD a. ?inimum of t'e range b. ?aximum of t'e range !. ?id-point of t'e range d. )verage of t'e range %orre!t )ns0er@ % Explanation@ Cnder 1F -> if a range of estimates is predi!ted and no amount in t'e range is more li+ely t'an any ot'er amount in t'e range> t'e Mmid-pointN of t'e range is used to measure t'e liability. 12. Cnder 1F -> s'ort-term obligations expe!ted to be refinan!ed !an be !lassified as non!urrent if t'e refinan!ing is !ompleted@ a. by t'e finan!ial reporting date. b. by issue date of t'e finan!ial statement. !. eit'er by t'e finan!ial statement date or before t'e date t'e finan!ial statement is issued. d. after t'e maturity date of t'e obligation. %orre!t )ns0er@ ) Explanation@ Cnder 1F -> a !ompany must !lassify its s'ort-term obligation as a !urrent liability if t'e refinan!ing 0as not !ompleted by t'e finan!ial reporting date. Fnly if t'e refinan!ing 0as !ompleted before t'e finan!ial reporting date> !an t'e !ompany !lassify t'e obligation as non-!urrent. 13. Examples of !ontingent assets in!lude all of t'e follo0ing ex!ept@ a. unreali/ed gain on t'e sale of investments. b. pending la0suit 0it' a probable favorable out!ome. !. possible refunds from t'e government in tax disputes. d. promise of land to be donated by !ity as an enti!ement to move manufa!turing fa!ilities. %orre!t )ns0er@ ) Explanation@ Typi!al !ontingent assets in!lude@ possible re!eipts of monies from gifts> donations> bonuses> possible refunds from t'e government in tax disputes> and pending !ourt !ases 0it' a probable favorable out!ome. 14. %ontingent assets need not be dis!losed in t'e finan!ial statements or in t'e notes if t'ey are@ a. virtually !ertain to o!!ur. b. probable to o!!ur. !. li+ely to o!!ur. d. possible but not probable to o!!ur.

%urrent 6iabilities and %ontingen!ies

13 ( 4<

%orre!t )ns0er@ D Explanation@ 1f reali/ation of t'e !ontingent asset is possible but not probable to o!!ur> no dis!losure is re5uired. 1$. For 0'i!' of t'e follo0ing areas a provision may be re!ogni/ed in t'e finan!ial statementD a. #ossibility of 0ar b. 2usiness re!ession !. =arranties d. -tri+e %orre!t )ns0er@ % Explanation@ %ommon areas for 0'i!' provisions may be re!ogni/ed in t'e finan!ial statements in!ludes@ la0suits> 0arranties> premiums> environmental> onerous !ontra!ts> and restru!turing. %ompanies do not re!ord or report in t'e notes to t'e finan!ial statements general ris+ !ontingen!ies in'erent in business operations :e.g.> t'e possibility of 0ar> stri+e> uninsurable !atastrop'es> or a business re!ession;. IFRS S"ort Ans*erB 1&. 2riefly des!ribe some of t'e similarities and differen!es bet0een C.-. 7))# and 1F - 0it' respe!t to t'e a!!ounting for liabilities. 1. )mong t'e similarities are@ :1; 1F - re5uires t'at !ompanies present !urrent and non!urrent liabilities on t'e fa!e of t'e balan!e s'eet> 0it' !urrent liabilities generally presented in order of li5uidity> :2; 2ot' pro'ibit t'e re!ognition of liabilities for future lossesI :3; 1F - and C.-. 7))# are similar in t'e treatment of asset retirement obligations :) Fs;> and :4; 1F - and C.-. 7))# are similar in t'eir treatment of !ontingen!ies. )lt'oug' t'e t0o 7))#s are similar 0it' respe!t to t'e above topi!s> t'ere are differen!es> in!luding@ :1; Cnder 1F -> t'e measurement of a provision related to a !ontingen!y is based on t'e best estimate of t'e expenditure re5uired to settle t'e obligation. 1f a range of estimates is predi!ted and no amount in t'e range is more li+ely t'an any ot'er amount in t'e range> t'e [mid-pointB of t'e range is used to measure t'e liability. 1n C.-. 7))#> t'e minimum amount in a range is usedI :2; 1F - permits re!ognition of a restru!turing liability> on!e a !ompany 'as !ommitted to a restru!turing plan. C.-. 7))# 'as additional !riteria :i.e.> related to !ommuni!ating t'e plan to employees;> before a restru!turing liability !an be establis'edI :3; t'e re!ognition !riteria for an asset retirement obligation are more stringent under C.-. 7))#Gt'e ) F is not re!ogni/ed unless t'ere is a present legal obligation and t'e fair value of t'e obligation !an be reasonably estimatedI and :4; t'e !riteria for re!ogni/ing !ontingent assets for insuran!e re!overies are re!ogni/ed if probableI 1F - re5uires t'e re!overy be Mvirtually !ertain>N before re!ognition of an asset is permitted.

13 ( 4= Test Ban, $or Inter-e#iate A%%ountin./ Fi$teent" E#ition