Current Liabilities and Contingencies
Mikel Company grants stock options and bonuses to its full-time employees. These benefits are considered employee ______.
compensation
When some doubt exists about whether or not a loss will occur in the future we refer to it as a(n)
contingent liability
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.)
credit cash $105,000 debit notes payable $100,000 debit interest expense $5,000
Jones Company signs a $15,000, 12-month note and receives $14,250 from the bank. Jones probably signed a(n) ______.
noninterest-bearing note
Which of the following statements is correct regarding short-term obligations?
They may be classified as long-term liabilities if they meet certain criteria.
An interest rate, unless otherwise specified, is typically a(n) ______ 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
Accounts payable typically (Select all that apply.)
are noninterest-bearing. are offered on open account.
Mikel Company grants stock options and bonuses to its full-time employees. These benefits are considered employee ______. Multiple choice question. loans
compensation
When it is uncertain whether an obligation really exists, we may recognize what is referred to as a
contingent loss.
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 noncurrent liability of $504,000 A current liability of $36,000
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
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
What financial reporting aspect helps investors and creditors assess the risks associated with liabilities that require expenditures of cash or other assets in the near term?
Classification as current or long-term
Which of the following are common types of employee compensation? (Select all that apply.)
Commissions Pensions Salaries
Which of the following statements regarding the recognition of liabilities is correct?
Conceptually, liabilities should be recognized at the present value of their future cash flows.
Generally, a current liability is expected to be satisfied from _____ _____. (Enter one word per blank.)
Current Assets
Roberts Corp. sells its products with a 2-year warranty. Estimated total warranty cost relating to sales for the year ended December 31, 2017, is $210,000. One-third of these estimated costs are expected to be incurred during 2018 with two-thirds expected to be incurred during 2019. Indicate the amount and classification of the estimated warranty cost on the balance sheet at 12/31/2017. (Select all that apply.)
Current liability of $70,000 long-term liability of $140,000
Which of the following are classified as current liabilities? (Select all that apply.)
Current portion of long-term debt Long-term loans with violated debt covenants Debt callable in the upcoming year, even when not expected to be called
Taylor Company's attorney informs its client that it is possible, but not probable, that the company will lose a currently litigated lawsuit. No reliable estimate of the potential loss is currently available. How should Taylor accrue and/or disclose this potential loss?
Disclose the contingency and state that an estimate cannot be made.
Choose the correct formula for calculating interest.
Face amount x annual interest rate x fraction of the year
True or false: The ability to refinance on a long-term basis can only be demonstrated by actually refinancing prior to issuing financial statements.
False
Match the correct classification on the statement of cash flows with the reportable item.
Financing: Cash received or paid related to principal of short-term notes payable. Operating: Interest paid on short-term notes payable.
Hendrickson Company's accountant decided not to accrue a liability for sick leave that the company employees did not take during the current year. The sick leave carries forward to the subsequent year. What condition most likely led the accountant to decide not to accrue a liability for unused sick leave?
Future absences are contingent on illness.
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. Instructions
Higher risk: Current liabilities already reported on balance sheet Lower risk: Noncurrent liabilities already reported on the balance sheet
On December 1, 2017, Katie Corp. borrows $100,000 from its bank and signs a 6-month, 12% promissory note. What accounts should be debited when the interest is paid on the maturity date and what are the amounts? Assume that no interest accruals were made during 2018 relating to this note. (Select all that apply.)
Interest expense: $5,000 Interest payable: $1,000
A contingent liability is accrued if which conditions are met? (Select all that apply.)
It is probable that a future loss will occur. The amount of the loss can be reasonably estimated.
The dollar amount of a potential loss from a contingent liability can be classified as (Select all that apply.)
Known Reasonably estimable
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. Employee bonuses earned during the year have not yet been paid.
Which of the following items represent loss contingencies? (Select all that apply.)
Legal liabilities Uncollectible receivables Warranty liabilities
Which of the following statements regarding noninterest-bearing notes is correct? (Select all that apply.)
Noninterest-bearing notes incur interest. The face amount of noninterest-bearing notes includes interest.
Which of the following transactions will increase a company's working capital?
Receipt of cash on a long-term note
Which of the following transactions require recognition of a liability on December 31? (Select all that apply.)
Receipt of inventory purchases on account. The utility bill for December will be paid January 3.
On December 1, 2017, Kathryn Corp. borrows $100,000 from its bank and signs a 6-month, 12% promissory note. Interest is payable when the loan matures. What entry should Kathryn make on December 31 relating to its note?
Recognize interest expense and interest payable of $1,000.
Which of the following is a requirement for recognizing employee compensation for future absences?
The amount of payment can be reasonably estimated.
Eric Company's accountant properly accrued a liability for sick leave that was not taken by the company's employees during the current year. Which of the following conditions caused the accountant to accrue a liability for the employees' unused sick leave?
The company has a policy to pay employees for unused sick leave.
Identify the statement that best describes the discriminating definition for classifying a liability as current.
The liability is expected to be satisfied from current assets.
Robert Company is planning to refinance a loan that is due during 2018. On January 25, 2018, the loan is refinanced with a 5-year note. Which of the following is correct with respect to the classification of the liability on the company's December 31, 2017 balance sheet?
The liability should be classified as current under IFRS and as noncurrent under U.S. GAAP.
What conditions must be met to recognize employee compensation for future absences? (Select all that apply.)
The obligation is attributable to employees' services already performed. The paid absences vest or the benefits can be accumulated over time. Payment is probable. The amount can be reasonably estimated.
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.
Which of the following statements regarding commercial paper are correct? (Select all that apply.)
They have minimum denominations of $25,000. They are often purchased by other companies as investments. They are unsecured notes.
True or false: Companies can ignore the interest component of advanced payments if the period between payment and delivery is less than one year.
True
Correctly match the accounting standards on the left with the correct requirement for classifying liabilities payable within the coming year that are to be refinanced as long-term liabilities.
U.S. GAAP: Refinancing must be completed before the date of issuance of the financial statements. IFRS: Refinancing must be completed before the balance sheet date.
Which of the following is an important characteristic of loss contingencies that is not commonly shared by other liabilities?
Uncertainty exists regarding whether a future event giving rise to the obligation will occur.
Identify the most common loss contingency that does not result in the recognition of a liability.
Uncollectible receivables
Which of the following represent common examples of employee-related third-party collections? (Select all that apply.)
Union dues Voluntary employee retirement contributions Income taxes Social security contributions
Which of the following represent an accrued liability? (Select all that apply.)
Unpaid interest relating to the past few months. Unpaid wages relating to the last few days in the current fiscal period just ended.
Which of the following are common examples of accrued liabilities? (Select all that apply)
Wages and salaries payable Interest payable Income tax 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.
Gunner Corp. has $2 million in bonds outstanding that mature during 2018. The company intends to refinance some of its obligation by issuing $1 million in 10-year bonds. On January 31, 2018, the new bond issue is sold. The funds will be utilized to pay part of the maturing bond obligation. The balance sheet at 12/31/2017 should show the following regarding the maturing bonds: (Select all that apply.)
a current bonds payable of $1 million. a long-term bonds payable of $1 million.
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's 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.
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.
Obligations to suppliers of merchandise and obligations for services purchased on open account are referred to as
accounts payable
Interest that has been incurred but not yet been paid is recognized as
accrued interest payable.
Expenses already incurred, but not yet paid are referred to as
accrued liabilities.
The ability to refinance a loan can be demonstrated by (Select all that apply.)
actual financing prior to the issuance of financial statements an existing refinancing agreement
Which of the following are common types of transactions that are recognized as "advances from customers?" (Select all that apply.)
airline tickets gift certificates and cards magazine subscriptions
Accrued liabilities relate to expenses that were _____, but not yet ____.
already incurred; paid
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.)
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.
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.
The amount accrued for future compensated absences is based on employees' ______ salary or wages.
current
Which of the following are commonly used nonfinancial performance measures for annual bonuses? (Select all that apply.)
customer satisfaction product or service quality
If a liability is classified as current, rather than noncurrent, the company's working capital will ______.
decrease
Adeline Company, a retail store, sold gift cards totaling $242,000 during the holiday season. The gift cards do not have an expiration date. At the end of the year, gift cards totaling $83,000 have not yet been redeemed. The $83,000 in unredeemed gift cards should be recognized as
deferred revenue.
During December, Martin Department Stores sells $240,000 in gift cards. When it sells the gift cards, Martin should recognize
deferred revenue.
Jones Company signs a $15,000, 12-month note and receives $14,250 from the bank. On the day that Jones signs the note, the company should debit (Select all that apply.)
discount on notes payable for $750. cash for $14,250.
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, 2017, Werner recognized estimated warranty-related costs of $54,000 for its 2017 sales. During 2018, Werner incurs repair costs of $21,000 related to products sold during 2017. The journal entry to record the cost of repairs would include a debit to:
estimated warranty liability
The effective interest rate on a noninterest bearing loan is _____ the stated rate.
higher than
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
iability—refundable deposits
Bonuses are accrued and recognized in the financial statements in the period
in which they are earned.
Jones Company signs a $15,000, 12-month note and receives $14,250 from the bank. Over the next 12 months, the carrying value of the note will
increase.
When a customer pays far in advance for goods or services, the seller should recognize
interest expense
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.
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
Current liabilities are those obligations that are payable within ______ or the operating cycle whichever is ____.
one year; longer
In the statement of cash flows, interest paid typically is reported in the
operating activities section.
Which of the following are financially based performance measures commonly used to determine employee bonuses? (Select all that apply.)
operating income earnings per share net income
Which of the following are common types of collections for third parties that most entities experience? (Select all that apply.)
payroll-related deductions sales taxes
When accounts receivable serve as collateral for a loan, we refer to the arrangement as ______ accounts receivable.
pledging
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 till June 30 of the following year. During the current calendar year for each subscription, Walden should recognize
revenue of $52.
Classifying liabilities as current or long-term helps creditors and investors assess the _____ that the liability will require expenditure of cash or another asset. (Enter one word per blank)
risk, riskiness, probability, or likelihood
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 within the 30 days of rental. If the customer does not return the equipment, Growler should recognize a
sale on the equipment.
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 taxes payable of $100. sales revenue of $1,000.
The most common way for corporations to obtain temporary financing is
through short-term bank loans.
Obligations to suppliers of merchandise that bear interest and are for a longer term than open accounts are called
trade notes payable
The feature that distinguishes loss contingencies from other liabilities is the
uncertainty that a loss will occur.
Short-term bank loans (Select all that apply.)
usually have a lower interest rate than long-term debt. are frequently used by large corporations as a significant component of capital structure.
Revenue associated with the sale of gift cards normally is recognized
when the gift cards are redeemed
Victor Inc. rewards its managers for achieving certain target sales. Victor should recognize the related bonuses
when the targets are met.
If a borrower pledges specific assets as collateral for a loan, the loan is considered
secured
Antoine Company purchases inventory costing $100,000 on account. Payment is due in full in 3 months. Antoine's normal borrowing rate is 8%. On the date of purchase, Antoine should recognize a liability equal to
$100,000.
Adeline Company, a retail store, sold gift cards totaling $242,000 during the 2017 holiday season. The gift cards do not have an expiration date. At the end of the year, gift cards totaling $83,000 have not yet been redeemed. What is the amount of sales revenue that Adeline should recognize for the year ended 12/31/2017?
$159,000
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.
Jingle Company signs a 6-month, $20,000 note. Stated annual interest rate is 8% payable at the maturity date. Interest incurred on the note is calculated as
$800.
On December 1, 2017, Kathryn Corp. borrows $100,000 from its bank and signs a 6-month, 12% promissory note. How many months of interest should be recognized in 2017?
1 month
Klein Corp. obtains a 6-month noninterest-bearing loan from its financial institution. The company signs a note for $10,000 and receives $9,500 from the bank. What is the annualized effective interest rate on this loan?
10.53%
Which of the following obligations are commonly classified as current liabilities? (Select all that apply.)
Dividends payable Commercial paper Accounts payable
Which of the following represents the formal credit instrument for a trade notes payable?
Promissory note
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 debit cash $100,000
On January 1, 2017, Merkel Company received $1,814 from a customer related to products to be delivered on December 31, 2018. The company normally sells the products for $2,000 in cash. The company's effective interest rate is 5%. On December
interest expense of $91
In practice, the assets most commonly used to secure loans are (Select all that apply.)
inventory account receivable
Unearned revenue represents a liability until the
related product or service is provided
A liability is accrued for a contingent loss if (Select all that apply.)
the amount can be reasonably estimated it is probable the confirming event will occur
In practice, liabilities payable within 1 year typically are recorded at their maturity amount because
the time value of money component associated with these liabilities is immaterial.
Mark Brandt, an employee of Mueller Corp., earned 3 weeks of compensated vacation time during the current year, but only took 2 weeks of vacation. His employer permits that 1 week of vacation can be carried forward to the following year. Mark fully intends to remain at his current employer and plans to take his vacation during the following year. His current weekly salary is $2,000. Mueller Corp. expects to grant a general salary increase of 5% effective at the beginning of the next year. What amount should Mueller accrue during the current year relating to Mark Brandt's carried-forward vacation?
$2,000
On January 1, 2017, Merkel Company received $1,814 from a customer related to products to be delivered on December 31, 2018. The company's effective interest rate is 5%. The company regularly sells the products for $2,000 in cash. The journal entry on December 31, 2018 (the date of delivery) will include a credit to revenue for:
$2,000
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.
Supreme Inc. sells its products with a 3-year warranty. The company estimates warranty costs relating to sales during 2017 as follows: 2017: $10,000; 2018: $25,000; 2019: $15,000. Assume that actual warranty costs during 2017 were as estimated. What is the amount of warranty expense that Supreme should recognize in its 2017 income statement?
$50,000
Which of the following represent the correct accounting treatment for loss contingencies that do not meet the criteria for accrual but are at least reasonably possible? (Select all that apply.)
A disclosure must describe the contingency. An estimate of the potential loss should be made (if possible) and disclosed.
A contingent liability typically is accrued for product warranties because it meets which of the following criteria? (Select all that apply.)
A future loss is probable. The amount of the future loss can be reasonably estimated.
Which of the following is correct regarding accrued interest payable?
Accrued interest payable relates to interest already incurred but not yet paid.
Best Equipment Inc. sells its products with a 3-year limited warranty. During 2017, Best Equipment recognizes $550,000 in sales revenue. Based on past experience, some of its products will need repair during the warranty period. What is the appropriate accounting treatment for Best Equipment's product warranty?
Best should estimate the contingent liability and accrue it in 2017.
Choose the statement that best reflects the nature of interest.
Interest is the "rent" paid by the borrower for using the lender's money.
Which of the following are essential characteristics of a liability? (Select all that apply.)
The future sacrifice arises from a present obligation. The obligation results from a past event. A future sacrifice of an economic benefit is probable.
Gift certificates, magazine subscriptions, layaway deposits, special order deposits, and airline tickets all are examples of
advances from customers
A loss contingency is recognized only if the event that gave rise to it occurred
before the financial statement date.
Which of the following obligations is not commonly classified as a current liability?
bonds payable
The sale of accounts receivables to obtain short-term financing is referred to as ______ receivables.
factoring
Amounts received that will be returned or remitted to others at a future date are recognized as:
liabilities
Unearned or deferred revenues are reported as
liabilities