Chapter 13: Current Liabilities and Contingencies

Williams Co., which has a taxable payroll of $300,000, is subject to the FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Williams Co.? A. $35,100 B. $24,600 C. $12,000 D. $ 8,400

$ 8,400; The computation of the federal and state unemployment taxes for Williams Co. is as follows: State unemployment tax payment (.02 × $300,000) = $6,000 *Federal unemployment tax (6.2% − 5.4%) ($300,000) = 2,400 Total federal and state unemployment tax $6,000 + 2,400 = $8,400

Hegel Corporation has $1,500,000 of short-term debt it expects to retire with proceeds from the sale of 50,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities? A. $1,000,000. B. $1,500,000. C. $500,000. D. $0.

$1,000,000; The maximum amount of short-term debt that can be excluded from current liabilities is limited to the amount secured through the refinancing arrangement. In this case the amount is $1,000,000 (50,000 × $20).

During 2016 Wannstedt 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, 4% in the year after sale, and 6% in the second year after sale. Sales and actual warranty expenditures for the first threeyear period were as follows: ............................Sales..............Actual Warranty Expenditures 2016..............$200,000............................$ 3,000 2017................500,000.................................15,000 2018................700,000................................45,000 ....................$1,400,000............................$63,000 What amount should Wannstedt report as a liability for this assurance type warranty at December 31, 2018? A. $0 B. $5,000 C. $68,000 D. $105,000

$105,000; Wannstedt's warranty liability at December 31, 2018, can be computed as follows: Total credited to the warranty liability account in 2016, 2017, and 2018 (12%* × $1,400,000) $168,000 Less: Total amount debited to the warranty liability account in 2016, 2017, and 2018 63,000 Warranty liability, 12/31/18 $105,000 *2% + 4% + 6% = 12% (168,000-63,000) = $105,000

Nietzsche Corn Flakes Company offers its customers a silver cereal spoon if they send in 5 boxtops from Nietzsche Corn Flakes boxes and $1.00. The Company estimates that 75% of the boxtops will be redeemed. In 2017 the Company sold 450,000 boxes of Corn Flakes and customers redeemed 220,000 boxtops receiving 44,000 spoons. If the spoons cost Nietzsche Company $2.50 each, how much liability for outstanding premiums should be recorded at the end of 2017? A. $23,500 B. $35,250 C. $58,750 D. $82,250

$35,250; Boxtops sold in 2017............................450,000 Estimated redemptions:....................450,000 × .75 = 337,500 Boxtops redeemed in 2017..............................................220,000 Estimated future redemptions..........................................117,500 Liability for outstanding claims: 117,500/5 = 23,500 × ($2.50 − $1.00) = $35,250

Strassberg Co. purchases a truck from Forward Auto for $65,000 on January 2, 2017. Forward estimated the assurance-type warranty costs on the truck to be $800 (Forward will pay for repairs for the first 50,000 miles or two years, whichever comes first). Strassberg Co. also purchases a $1,000 service-type warranty for an additional 50,000 miles or two years. Forward incurs warranty costs related to the assurance-type warranty of $300 in 2017 and $500 in 2018. Forward records revenue on the service-type warranty on a straight-line basis. What is the amount of warranty liability and unearned warranty revenue that should be shown on the balance sheet of Forward at December 31, 2017? Warranty Liability - Unearned Warranty Revenue A. $500 - $ 500 B. $400 - $1,000 C. $500 - $1,000 D. $400 - $ 500

$500 - $1,000; To record the sale of the truck and related warranties, Forward would have made the following entry: ..........................January 2, 2017 Cash ($65,000 + $1,000)................66,000 Warranty Expense..................................800 ....Warranty Liability.......................................................800 ....Unearned Warranty Revenue............................1,000 ....Sales Revenue.......................................................65,000 To record warranty costs incurred in 2017: ..........................January 2 to December 31, 2017 Warranty Liability..................................300 Cash, Inventory, Accrued Payroll........................300 Therefore at December 31, 2017 the balance for Warranty Liability should be $500 ($800 − $300) and Unearned Warranty Revenue should be $1,000

Wilson Company is involved in a litigation suit concerning the cleanup of old underground oil storage tanks on property it sold to a housing development company five years ago. The attorneys for Wilson Company cannot give a best estimate for the probable liability; however, the attorneys state that the liability to Wilson Company will probably fall within a range of $2 million to $10 million. According to the SEC, what should Wilson Company record with regards to this environmental liability? A. No entry is required. B. A loss and liability of $10 million. C. A loss and liability of $6 million. D. A loss and liability of $2 million.

A loss and liability of $2 million; The SEC argues that if an environmental liability is within a range and no amount within the range is the best estimate, then management should recognize the minimum amount of the range.

Which of the following would not constitute evidence concerning the ability to consummate the refinancing of a short-term obligation? A. Actual refinancing after the balance sheet date by issuance of a longterm obligation. B. A statement by the board of directors that refinancing is inevitable. C. Entering into a financing agreement that clearly permits refinancing on a longterm basis with terms that are readily determinable. D. Actual refinancing after the balance sheet date by issuance of equity securities.

A statement by the board of directors that refinancing is inevitable.

With respect to the following loss contingencies, would a loss normally be accrued or not accrued? Loss Related to Receivable Collections - Loss Related to Product Warranties A. Accrued - Not Accrued B. Not Accrued - Accrued C. Not Accrued - Not Accrued D. Accrued - Accrued

Accrued - Accrued

On October 1, 2016, a company borrowed cash and signed a one-year, interest-bearing note on which both the principal and interest are payable on October 1, 2017. How will the note payable and the related interest be classified in the December 31, 2016, balance sheet? Note Payable...........Accrued Interest A. Current liability...........Non-current liability B. Non-current liability...........Current liability C. Current liability...........Current liability D. Non-current liability...........Non-current liability

Current liability...........Current liability

If a loss is either probable or estimable, but not both, and if there is at least a reasonable possibility that a liability may have been incurred, the proper accounting treatment would be reflected by which of the following? A. Record the loss and the related liability, but at an amount that is significantly conservative. B. Record the loss and the related liability, but indicate in a footnote to the financial statements that this loss may not occur because one of the criteria may not be met. C. Disclose in the footnotes to the financial statements (1) the nature of the contingency, and (2) an estimate of the possible loss or range of loss or a statement that an estimate cannot be made. D. Do not record the contingency or make mention of it in the financial statements because it lacks meeting the required criteria.

Disclose in the footnotes to the financial statements (1) the nature of the contingency, and (2) an estimate of the possible loss or range of loss or a statement that an estimate cannot be made.

In accounting for compensated absences, a company following GAAP would account for the liability using the: Cash Basis - Accrual Basis A. Yes - Yes B. Yes - No C. No - Yes D. No - No

No - Yes

Which of the following loss contingencies is normally accrued? A. Pending or threatened litigation. B. General or unspecified business risk. C. Obligations related to product warranties. D. Risk of property loss due to fire.

Obligations related to product warranties.

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

Offsetting current liabilities against assets that are to be applied to their liquidation.

A liability has three essential characteristics; which of the following is not one of them? A. It is a present obligation that entails settlement by probable future transfer or use of cash, goods, or services. B. The obligation must be liquidated using cash, goods, or services that were earned by the entity in the performance of their normal business operation. C. The liability must be an unavoidable obligation. D. The transaction or other event creating the obligation must have already occurred.

The obligation must be liquidated using cash, goods, or services that were earned by the entity in the performance of their normal business operation.

The Diana Co. issues a $208,000 6-month, zero-interest-bearing note to the Tang National Bank. The present value of the note is $200,000. The entry to record this transaction by Diana Co. would include: A. a credit to Notes Payable of $200,000. B. a debit to Discount on Notes Payable of $8,000. C. a credit to Discount on Notes Payable of $8,000. D. a debit to cash of $208,000.

a debit to Discount on Notes Payable of $8,000; The following entry would be made by Diana Co.: Cash.....................................................200,000 Discount on Notes Payable...........8,000 ....Notes Payable.................................................208,000

A contingency is defined by the accounting profession as: A. an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. B. an existing condition, situation, or set of circumstances involving uncertainty as to a possible loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur. C. an event that will result in the requirement to record a liability if it can be shown that an asset is in danger of being lost to the enterprise and the company has no ability to avoid the loss. D. an uncertain event that must have a reasonable chance of occurrence and the amount must be reasonably determinable by the company.

an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss to an enterprise that will ultimately be resolved when one or more future events occur or fail to occur.

Current liabilities are: A. liabilities that are due and payable on the balance sheet date. B. liabilities that may be paid out of any asset pool accumulated by the enterprise as long as payment is due within one year. C. due within one year or one operating cycle, whichever is longer. D. void of notes payable, as notes are always longterm.

due within one year or one operating cycle, whichever is longer.

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

the cause for action occurred during the accounting period covered by the financial statements.

An enterprise is required to exclude a short-term obligation from current liabilities if it intends to refinance the obligation on a longterm basis and: A. the enterprise can demonstrate the ability to consummate the refinancing. B. the obligation is not a part of normal operations. C. it can demonstrate that a negative effect on working capital will result if it is not reclassified. D. the interest rate on the longterm obligation is not above the prime rate.

the enterprise can demonstrate the ability to consummate the refinancing.

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

the number of financing institutions that refused to refinance the debt, if any.

The currently maturing portion of longterm debt should be classified as a current liability if: A. the debt is to be converted into capital stock. B. the debt is to be refinanced on a longterm basis. C. the funds used to liquidate it are currently classified as a longterm investment on the balance sheet. D. the portion so classified will be liquidated within one year using current assets.

the portion so classified will be liquidated within one year using current assets.

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

vested rights are not contingent upon an employee's future service.