Chapter 13-AccountingTestReview

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

c

117. Excom manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $300 per unit sold and reported a liability for estimated warranty costs $10.4 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $324 million and paid warranty claims of $12,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year? a. $3,733,333. b. $6,000,000. c. $16,400,000. d. $18,000,000.

c

5. GreatBargain made cash sales during the month of October of $320,000. The sales are subject to a 8% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sale transactions? a. Credit Sales Revenue for $345,600. b. Credit Notes Payable for $19,200. c. Credit Sales Taxes Payable for $25,600. d. Debit Accounts Receivable for $320,000.

c

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

c

72. Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2020. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation? a. No recognition b. Note disclosure only c. Operating expense of $800,000 and liability of $800,000 d. Appropriation of retained earnings of $800,000

c

123. During 2019, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) Sales. Actual Warranty Expenditures 2019 $ 1,600,000 $ 39,000 2020 2,500,000 65,000 2021 2,100,000 135,000 $6,200,000 $239,000 What amount should Rao report as a liability at December 31, 2021? a. $0 b. $71,000 c. $84,000 d. $319,000

..d

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

a

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

a

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

a

1. Craig issues a $720,000, five-month, zero-interest-bearing note to the National Bank to borrow $700,000 on October 1, 2020. What amount is the note payable recorded at on October 1, 2020 and how much interest is recognized from October 1 to December 31, 2020? a. $700,000 and $0. b. $720,000 and $12,000. c. $720,000 and $0. d. $700,000 and $20,000.

b

105. Palco Co., which has a taxable payroll of $1,200,000, is subject to FUTA tax of 0.8% and a state contribution rate of 4.0%. What is the total amount of federal and state unemployment tax for Palco Co.? a. $139,200 b. $57,600 c. $48,000 d. $33,600

b

114. Sandy Shoes Foot Inc. is involved in litigation regarding a faulty product sold in a prior year. The company has consulted with its attorney and determined that it is possible that they may lose the case. The attorneys estimated that there is a 40% chance of losing. If this is the case, their attorney estimated that the amount of any payment would be $800,000. What is the required journal entry as a result of this litigation? a. Debit Litigation Expense for $800,000 and credit Litigation liability for $800,000. b. No journal entry is required. c. Debit Litigation Expense for $320,000 and credit Litigation Liability for $320,000. d. Debit Litigation Expense for $480,000 and credit Litigation Liability for $480,000.

b

137. On January 1, 2021, Bacon Co. leased a building to Horner Corp. for a ten-year term at an annual rental of $175,000. At inception of the lease, Bacon received $700,000 covering the first two years' rent of $350,000 and a security deposit of $350,000. This deposit will not be returned to Horner upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $700,000 should be shown as a current and long-term liability, respectively, in Bacon's December 31, 2021 balance sheet? Current Liability Long-term Liability a. $0 $700,000 b. $175,000 $350,000 c. $350,000 $350,000 d. $350,000 $175,000

b

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

b

40. Which of the following is not a condition allowing a company to exclude a short-term obligation from current liabilities? a. Liability is contractually due to be settled more than a year after the balance sheet date. b. Obligation must be due within one year. c. A contractual right to defer settlement of the liability at least a year after the balance sheet date. d. Subsequently refinance the obligation on a long-term basis.

b

8. Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $5,400,000 to $9,000,000. As a result of the above facts, Wooten should accrue a. a loss contingency of $9,000,000. b. a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000. c. no disclosure. d. no loss contingency but disclose a contingency of $5,400,000 to $9,000,000.

b

90. Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2020 for the purchase of $500,000 of inventory. The face value of the note was $507,800. Greeson used a "Discount of Note Payable" account to initially record the note. Assuming that the discount will be amortized equally over the 3-month period and that there was no adjusting entry made for November, the adjusting entry made at December 31, 2020 will include a a. debit to Discount on Note Payable for $2,600. b. debit to Interest Expense for $5,200. c. credit to Discount on Note Payable for $2,600. d. credit to Interest Expense for $5,200.

b

94. Craig borrowed $700,000 on October 1, 2020 and is required to pay $720,000 on March 1, 2021. What amount is the note payable recorded at on October 1, 2020 (notes payable minus any discount on notes payable) and how much interest is recognized from October 1 to December 31, 2020? a. $700,000 and $0. b. $700,000 and $12,000. c. $720,000 and $0. d. $700,000 and $20,000.

b

1. Slack Inc. borrowed $400,000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31? a. $0. b. $48,000. c. $32,000. d. $36,000.

d

115. Xtra Processes is involved with innovative approaches to finding energy reserves. Xtra recently built a facility to extract natural gas at a cost of $12 million. However, Xtra is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $17 million (the present value of which is $6.5 million). What is the journal entry required to record the asset retirement obligation? a. No journal entry required. b. Debit Natural Gas Facility for $17,000,000 and credit Asset Retirement Obligation for $17,000,000 c. Debit Natural Gas Facility for $5,000,000 and credit Asset Retirement Obligation for $5,000,000. d. Debit Natural Gas Facility for $6,500,000 and credit Asset Retirement Obligation for $6,500,000.

d

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

d

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

d

4. A company buys an oil rig for $2,800,000 on January 1, 2020. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2020 as a result of these events? Assume that the company uses straight-line method for depreciation and expects no salvage value. a. Depreciation expense of $340,000 b. Depreciation expense of $303,133 and interest expense of $60,000 c. Depreciation expense of $280,000 and interest expense of $23,133 d. Depreciation expense of $303,133 and interest expense of $23,133

d

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

d

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

d