ACC3120: SB CH13

Spencer Corp.'s attorney estimates that the company will ultimately have to pay between $250,000 and $500,000 relating to current litigation. Spencer should accrue a contingent liability and loss of

$250,000. Reason: When no amount within the range appears more likely than others, we record the minimum amount.

Able Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $10,000 (20%) and $20,000 (80%); Year 2: $15,000 (50%) and $25,000 (50%).The company's effective interest rate is 4%. Assuming the warranty costs are settled at the end of Years 1 and 2, calculate the estimated warranty liability using the expected cash flow method.

$35,797 Reason: [(10,000 x .20) + (20,000 x .80)] x 0.96154 + [(15,000 x .50) + (25,000 x .50)] x 0.92456 = $35,797

Supreme Inc. sells its products with a 3-year warranty. The company estimates warranty costs relating to sales during the current year are as follows: Current year (Year 1): $10,000; Year 2: $25,000; Year 3: $15,000. Assume that actual warranty costs during the current year were as estimated. What is the amount of the estimated warranty liability that Supreme should recognize on its current year balance sheet?

$40,000 Reason: $25,000 + $15,000 = $40,000. The warranty liability is reduced by the warranty costs paid during the current year.

Abbott Corp.'s attorney estimates that the company will ultimately have to pay between $350,000 and $500,000 relating to current litigation, and that the most likely amount of the loss will be equal to $400,000. Abbott Corporation should accrue a contingent liability and loss of

$400,000.

Greenbaum Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $20,000 (40%) and $30,000 (60%); Year 2: $30,000 (70%) and $20,000 (30%). The company's effective interest rate is 5%. Calculate the estimated warranty liability using the expected cash flow method.

$49,251 Reason: $[(20k x .4)+(30k x .6) x 0.95238]+ $[(30k x .7)+(20k x .3) x 0.90703

Select all that apply Wagner Company's financial records show that it has a mortgage that requires monthly principal payments of $3,000. The mortgage loan matures in 15 years. What should Wagner show on its balance sheet at the end of the current year? (Select all that apply.) A current liability of $36,000 A current liability of $540,000 A noncurrent liability of $540,000 A noncurrent liability of $504,000

A current liability of $36,000 A noncurrent liability of $504,000

Which of the following is correct regarding accrued interest payable?

Accrued interest payable relates to interest already incurred but not yet paid.

Select all that apply Which of the following liabilities should be classified as current? (Select all that apply.) A note that is due in December of the current year will be satisfied by signing a new 18-month note. An 18-month note that is due in December of the current year will be paid in full. A 6-month note that is due in December of the current year will be satisfied by signing a new 6-month note.

An 18-month note that is due in December of the current year will be paid in full. A 6-month note that is due in December of the current year will be satisfied by signing a new 6-month note.

The dollar amount of a potential loss when reporting a _________ ____________ can be classified as either known, reasonably estimable, or not reasonably estimable.

Blank 1: contingent, loss, or contingency Blank 2: liability, loss, or contingency

Generally, a current liability is expected to be satisfied from _________ ___________ . (Enter one word per blank.)

Blank 1: current or short-term Blank 2: assets

A _______ of ________ is an agreement between a bank and a company that allows the company to borrow up to a specified amount without completing additional paper work. (Enter one word per blank)

Blank 1: line Blank 2: credit

The expected cash flow approach is the appropriate method for estimating _________ - ____________ contingent liabilities.

Blank 1: long Blank 2: term

Costs incurred to satisfy customer claims under an extended warranty period are recorded during the same period as the related ___________. (Enter only one word.)

Blank 1: revenue, revenues, sale, or sales

Classifying liabilities as current or noncurrent depends on when the contingent liability is expected to be _________.

Blank 1: settled, satisfied, or paid

Select all that apply Which of the following transactions require the recognition of a liability? (Select all that apply.) Placing a purchase order for inventory. Collection of a refundable deposit from a customer. Receipt of payment for a service performed next month.

Collection of a refundable deposit from a customer. Receipt of payment for a service performed next month.

Select all that apply Which of the following are common types of employee compensation? (Select all that apply.) Multiple select question. Commissions Employee loans Salaries Pensions

Commissions Salaries Pensions

Select all that apply Roberts Corp. sells its products with a 2-year warranty. Estimated total warranty cost relating to sales for the year ended December 31, 2024, is $210,000. One-third of these estimated costs are expected to be incurred during 2025 with two-thirds expected to be incurred during 2026. Indicate the amount and classification of the estimated warranty cost on the balance sheet at 12/31/2024. (Select all that apply.) Multiple select question. long-term liability of $210,000 Current liability of $70,000 long-term liability of $140,000 current liability of $210,000

Current liability of $70,000 long-term liability of $140,000

Supreme Inc. offers a 3-year extended warranty for all its products. On January 1, the company collects $45,000 relating to extended warranty contracts. What entry should Supreme make on January 1?

Debit cash and credit deferred revenue for $45,000.

Supreme Inc. offers a 3-year extended warranty for all its products. On January 1, of the current year the company collects $45,000 relating to extended warranty contracts. What entry should Supreme make on December 31, of the current year?

Debit deferred revenue for $15,000 and credit revenue—extended warranty for $15,000.

Match the following risk levels with the type of liability it is most frequently associated with from the perspective of a potential investor or creditor. Higher risk<---------> Lower risk<---------> Current liabilities already reported on balance sheet Noncurrent liabilities already reported on the balance sheet

Higher risk<--------->Current liabilities already reported on balance sheet Lower risk<--------->Noncurrent liabilities already reported on the balance sheet

Choose the statement that best reflects the nature of interest. Interest is the "rent" paid by the borrower for using the lender's money. Interest represents the return of investment to the lender. Interest is a fee that the lender charges for processing a loan agreement.

Interest is the "rent" paid by the borrower for using the lender's money.

Select all that apply Which of the following are common examples of accrued liabilities? (Select all that apply) Short-term notes payable Interest payable Income tax payable Wages and salaries payable Bonds payable

Interest payable Income tax payable Wages and salaries payable

Select all that apply A contingent liability is accrued if which conditions are met? (Select all that apply.) The amount of the loss is greater than 10% of revenue. It is probable that a future loss will occur. It is possible that a future loss will occur. The amount of the loss can be reasonably estimated.

It is probable that a future loss will occur. The amount of the loss can be reasonably estimated.

Select all that apply The dollar amount of a potential loss from a contingent liability can be classified as (Select all that apply.) Known Material Immaterial Reasonably estimable

Known Reasonably estimable

Select all that apply Which of the following situations would give rise to an employee-related accrued liability as of December 31 of the current year? (Select all that apply.) Labor negotiations resulted in a 4% pay increase retroactively applied to December of the current year. Employees were promised a bonus if net income increases by at least 10%; the actual increase was 9.8%. Labor negotiations resulted in a 5% pay increase effective January 1 of the following year. Employee bonuses earned during the year have not yet been paid.

Labor negotiations resulted in a 4% pay increase retroactively applied to December of the current year. Employee bonuses earned during the year have not yet been paid.

Select all that apply Which of the following situations would give rise to an employee-related accrued liability as of December 31 of the current year? (Select all that apply.) Labor negotiations resulted in a 4% pay increase retroactively applied to December of the current year. Labor negotiations resulted in a 5% pay increase effective January 1 of the following year. Employee bonuses earned during the year have not yet been paid. Employees were promised a bonus if net income increases by at least 10%; the actual increase was 9.8%.

Labor negotiations resulted in a 4% pay increase retroactively applied to December of the current year. Employee bonuses earned during the year have not yet been paid.

Select all that apply Which of the following are classified as current liabilities? (Select all that apply.) Multiple select question. All long-term loans with debt covenants Long-term loans with violated debt covenants Current portion of long-term debt Debt callable in the upcoming year, even when not expected to be called Notes payable due in two years that require monthly interest payments

Long-term loans with violated debt covenants Current portion of long-term debt Debt callable in the upcoming year, even when not expected to be called

Select all that apply What conditions must be met to recognize employee compensation for future absences? (Select all that apply.) Payment is probable. The paid absences vest or the benefits can be accumulated over time. The obligation is attributable to employees' services already performed. The amount can be accurately determined. The amount can be reasonably estimated.

Payment is probable. The paid absences vest or the benefits can be accumulated over time. The obligation is attributable to employees' services already performed. The amount can be reasonably estimated.

Match the terms with the correct description. Probable<-----> Reasonably possible<------> Remote<-------> Confirming event is likely to occur The chance that the confirming event will occur is more than remote but less than likely The chance that the confirming event will occur is slight

Probable<----->Confirming event is likely to occur Reasonably possible<------>The chance that the confirming event will occur is more than remote but less than likely Remote<------->The chance that the confirming event will occur is slight

Which of the following transactions will increase a company's working capital?

Receipt of cash on a long-term note

Select all that apply Which of the following transactions require recognition of a liability on December 31? (Select all that apply.) Employees are promised a 4% pay raise starting next month. Receipt of inventory purchases on account. The utility bill for December will be paid January 3.

Receipt of inventory purchases on account. The utility bill for December will be paid January 3.

Which of the following represents the formal credit instrument for an accounts payable?

Supplier's invoice

Which of the following is a requirement for recognizing employee compensation for future absences?

The amount of payment can be reasonably estimated.

Select all that apply A contingent liability typically is accrued for product warranties because it meets which of the following criteria? The amount of the loss cannot be reasonably estimated. A future loss is certain. The amount of the future loss can be reasonably estimated. A future loss is probable. A future loss is uncertain.

The amount of the future loss can be reasonably estimated. A future loss is probable.

Select all that apply Karin Company has a loan due on July 1 of next year. What conditions must Karin meet (at a minimum) so that the note can be classified as a long-term liability on the company's balance sheet at December 31 of the current year? (Select all that apply.) The company must have entered into a long-term refinancing agreement. The company must intend to refinance the obligation on a long-term basis. The company must have demonstrated the ability to refinance the obligation on a long-term basis.

The company must intend to refinance the obligation on a long-term basis. The company must have demonstrated the ability to refinance the obligation on a long-term basis.

Select all that apply Which of the following statements regarding noninterest-bearing notes is correct? (Select all that apply.) Noninterest-bearing notes do not include interest. The face amount of noninterest-bearing notes includes interest. The face amount of noninterest-bearing notes does not include interest. Noninterest-bearing notes incur interest.

The face amount of noninterest-bearing notes includes interest. Noninterest-bearing notes incur interest.

Select all that apply Which of the following statements regarding noninterest-bearing notes is correct? (Select all that apply.) The face amount of noninterest-bearing notes includes interest. Noninterest-bearing notes do not include interest. Noninterest-bearing notes incur interest. The face amount of noninterest-bearing notes does not include interest.

The face amount of noninterest-bearing notes includes interest. Noninterest-bearing notes incur interest.

Select all that apply What conditions must be met to recognize employee compensation for future absences? (Select all that apply.) The amount can be accurately determined. The obligation is attributable to employees' services already performed. The amount can be reasonably estimated. Payment is probable. The paid absences vest or the benefits can be accumulated over time.

The obligation is attributable to employees' services already performed. The amount can be reasonably estimated. Payment is probable. The paid absences vest or the benefits can be accumulated over time.

Which of the following is necessary for a loss contingency to exist?

The potential loss must arise from an event that occurred prior to the financial statement date.

Select all that apply Which of the following transactions require recognition of a liability on December 31? (Select all that apply.) The utility bill for December will be paid January 3. Employees are promised a 4% pay raise starting next month. Receipt of inventory purchases on account.

The utility bill for December will be paid January 3. Receipt of inventory purchases on account.

Select all that apply Which of the following statements regarding commercial paper are correct? (Select all that apply.) They are secured notes. They are often purchased by other companies as investments. They have minimum denominations of $25,000. They are unsecured notes. Their maturity periods range from 180-450 days.

They are often purchased by other companies as investments. They have minimum denominations of $25,000. They are unsecured notes.

Which of the following statements is correct regarding short-term obligations?

They may be classified as long-term liabilities if they meet certain criteria.

Select all that apply Which of the following represent an accrued liability? (Select all that apply.) Unpaid interest relating to the past few months. Interest associated with a loan signed today. Insurance premiums paid for the following period. Unpaid wages relating to the last few days in the current fiscal period just ended.

Unpaid interest relating to the past few months. Unpaid wages relating to the last few days in the current fiscal period just ended.

Select all that apply Which of the following represent an accrued liability? (Select all that apply.) Unpaid wages relating to the last few days in the current fiscal period just ended. Unpaid interest relating to the past few months. Interest associated with a loan signed today. Insurance premiums paid for the following period.

Unpaid interest relating to the past few months. Unpaid wages relating to the last few days in the current fiscal period just ended.

Select all that apply Which of the following represent an accrued liability? (Select all that apply.) Unpaid wages relating to the last few days in the current fiscal period just ended. Unpaid interest relating to the past few months. Interest associated with a loan signed today. Insurance premiums paid for the following period.

Unpaid wages relating to the last few days in the current fiscal period just ended. Unpaid interest relating to the past few months.

Select all that apply Which of the following are common examples of accrued liabilities? (Select all that apply) Wages and salaries payable Bonds payable Short-term notes payable Income tax payable Interest payable

Wages and salaries payable Income tax payable Interest payable

Grouper Company arranged for a line of credit with its local bank. The company can borrow up to $100,000 as needed. Grouper pays the bank a fee of $200 per year regardless of any specific borrowing under the arrangement. This is an example of

a committed line of credit.

Debt that is callable by the creditor in the upcoming year, but is not expected to be called, is reported as

a current liability

Norbert Company recently signed a 20-year mortgage that requires monthly payments of principal and interest. Norbert should report the mortgage principal payments due during the following accounting period as

a current liability

Cash received from customers in advance of providing the related services or delivering the related goods is recognized as:

a liability

Walden Company collects the annual fee for 100 magazine renewals. The annual price is $104 per subscription and covers 52 weekly magazines. When Walden Company receives payment for each subscription renewal, the company should recognize

a liability for $104.

Select all that apply Gunner Corp. has $2 million in bonds outstanding that mature during 2025. The company intends to refinance some of its obligation by issuing $1 million in 10-year bonds. On January 31, 2025, the new bond issue is sold. The funds will be utilized to pay part of the maturing bond obligation. The balance sheet at 12/31/2024 should show the following regarding the maturing bonds: a long-term bonds payable of $1 million. a long-term bonds payable of $2 million. a current bonds payable of $2 million. a current bonds payable of $1 million.

a long-term bonds payable of $1 million. a current bonds payable of $1 million.

Christenson Corp. signs a short-term notes payable and pledges a portion of its accounts receivables as collateral. This type of loan is referred to as

a secured loan.

Interest that has been incurred but not yet been paid is recognized as

accrued interest payable.

Gift certificates, magazine subscriptions, layaway deposits, special order deposits, and airline tickets all are examples of

advances from customers

Select all that apply When employees have provided services for which they have not been paid by the financial statement date, the employer must recognize (Select all that apply.) Multiple select question. an accrued liability prepaid expense accounts payable compensation expense cash

an accrued liability compensation expense

Schmidt Company borrows $10,000 from its bank and signs a 6-month note. Interest, which is due quarterly, is specified in the note as 6%. The interest rate stated in the loan agreement most likely applies to

an entire year.

Consistent with SFAC No. 7, long-term contingent liabilities should be measured using

an expected cash flow approach.

An interest rate, unless otherwise specified, is typically a(n) Blank______ rate. (Enter one word per blank)

annual

Earnings-per-share, net income, and operating income are commonly used financial performance indicators used to determine:

annual bonuses

Select all that apply Short-term bank loans (Select all that apply.) are frequently used by large corporations as a significant component of capital structure. usually have a higher interest rate than long-term debt. are not frequently used by large corporations as a significant component of capital structure. usually have a lower interest rate than long-term debt.

are frequently used by large corporations as a significant component of capital structure. usually have a lower interest rate than long-term debt.

Select all that apply Accounts payable typically (Select all that apply.) bear interest. are noninterest-bearing. are offered on open account. require a formal promissory note.

are noninterest-bearing. are offered on open account.

A loss contingency is recognized only if the event that gave rise to it occurred

before the financial statement date.

Which of the following is not a category used to assess the likelihood of a loss contingency?

certain

Unsecured notes sold in minimum denominations of $25,000 with maturities ranging from 1 to 270 days are referred to as

commercial paper.

Mikel Company grants stock options and bonuses to its full-time employees. These benefits are considered employee Blank______.

compensation

Warranties that assure the customer that the products are delivered free from major defects typically result in the accrual of

contingent liabilities

When it is uncertain whether an obligation really exists, we may recognize what is referred to as a

contingent loss.

Select all that apply On January 1, Western Corp. borrows $100,000 from FirstBank using a six-month, 10% promissory note. Interest and principal are payable at maturity. The journal entry on January 1 includes (Select all that apply.) credit notes payable $100,000 credit interest payable $5,000 credit interest payable $10,000 credit notes payable $105,000 debit cash $100,000 debit cash $110,000 debit cash $105,000

credit notes payable $100,000 debit cash $100,000

Select all that apply On January 1, Western Corp. borrows $100,000 from FirstBank using a six-month, 10% promissory note. Interest and principal are payable at maturity. The journal entry on June 30 includes (Select all that apply.) debit notes payable $100,000 credit notes payable $105,000 debit interest expense $5,000 debit cash $105,000 credit cash $105,000 debit interest expense $10,000 credit cash $100,000

debit notes payable $100,000 debit interest expense $5,000 credit cash $105,000 Reason: $100,000 x 10% x 6/12 = $5,000 interest expense

If a liability is classified as current, rather than noncurrent, the company's working capital will Blank______.

decrease

During December, Martin Department Stores sells $240,000 in gift cards. When it sells the gift cards, Martin should recognize

deferred revenue.

The costs of satisfying product-related warranties should be recorded as an expense

during the year of sale.

Werner Inc. sells its products with a 2-year warranty. On December 31, Werner recognized estimated warranty-related costs of $54,000 for its current year sales. During the following year, Werner incurs repair costs of $21,000 related to products sold during the previous year. The journal entry to record the cost of repairs would include a debit to:

estimated warranty liability

All liabilities involve a probable Blank______ sacrifice of economic benefits and arise as a result of Blank______ transactions or events.

future; past

Select all that apply Which of the following are common types of transactions that are recognized as "advances from customers?" (Select all that apply.) gift certificates and cards airline tickets magazine subscriptions sales on account payment of accounts receivable

gift certificates and cards airline tickets magazine subscriptions

Select all that apply A liability is accrued for a contingent loss if (Select all that apply.) it is probable the confirming event will occur the amount is not reasonably estimable it is reasonably possible the confirming event will occur the amount can be reasonably estimated it is remote that the confirming event will occur

it is probable the confirming event will occur the amount can be reasonably estimated

Unearned or deferred revenues are reported as

liabilities

Cash collected from customers as refundable deposits or as advance payments for products or services are recognized as

liabilities.

Taxes collected for taxing authorities are recognized as

liabilities.

Select all that apply Unredeemed cash rebates related to current year sales should be estimated and the amount treated as a(n): (Select all that apply.) liability expense reduction in revenue note disclosure loss

liability reduction in revenue

Growler Commercial Cleaning Company collects a $1,000 deposit associated with the rental of industrial cleaning equipment. The deposit is refundable upon return of the equipment. When the customer returns the cleaning equipment, Growler should debit the following account

liability—refundable deposits

Growler Commercial Cleaning Company collects a $1,000 deposit associated with the rental of industrial cleaning equipment. The deposit is refundable when the customer returns the equipment. Upon receipt of the deposit, Growler should credit a

liability—refundable deposits.

Recognition of costs related to manufacturers' quality assurance warranty during the same period that the related revenue is recognized is consistent with the

matching principle

Select all that apply Which of the following are financially based performance measures commonly used to determine employee bonuses? (Select all that apply.) customer satisfaction net income other income earnings per share operating income

net income earnings per share operating income

Jones Company signs a $15,000, 12-month note and receives $14,250 from the bank. Jones probably signed a(n) Blank______.

noninterest-bearing note

Current liabilities are those obligations that are payable within one year or the Blank______, whichever is Blank______.

operating cycle; longer

Revenue related to extended warranty contracts typically is recognized

over time.

Select all that apply An extended warranty contract (Select all that apply.) provides protection beyond the manufacturer's original warranty. is considered an integral part of the related product. essentially constitutes a separate performance obligation.

provides protection beyond the manufacturer's original warranty. essentially constitutes a separate performance obligation.

Select all that apply Which of the following are used to categorize the likelihood of the occurrence of a future loss? (Select all that apply.) reasonably possible probable certain uncertain remote

reasonably possible probable remote

Unearned revenue represents a liability until the

related product or service is provided

When goods are delivered for which the seller received cash in advance, the seller recognizes

revenue

Walden Company collects the annual fee for 100 magazine renewals. The annual price is $104 per subscription and covers 52 weekly magazines. The subscription period is from July 1 of the current year until June 30 of the following year. During the current calendar year for each subscription, Walden should recognize

revenue of $52. Reason: 1/2 of the one-year subscription price is earned

Select all that apply Lester Corp. sells merchandise to a customer for $1,000. The company also collects state and local sales taxes of 6% and 4%, respectively. At the time of sale, Lester should recognize the following credits in its ledger (Select all that apply.) sales revenue of $1,000. sales revenue of $1,100. sales taxes payable of $100.

sales revenue of $1,000. sales taxes payable of $100.

If a borrower pledges specific assets as collateral for a loan, the loan is considered

secured

Revenue related to extended warranty contracts typically is recognized over time because

the warranty provides coverage over time.

The most common way for corporations to obtain temporary financing is

through short-term bank loans.

The feature that distinguishes loss contingencies from other liabilities is the

uncertainty that a loss will occur.

Extended warranty contracts provide

warranty protection beyond the manufacturer's original warranty.

Revenue associated with the sale of gift cards normally is recognized

when the gift cards are redeemed