Ch.13 Quiz

A company discloses gain contingencies in the notes only when a high probability exists for realizing them.

True

Companies report the amount of social security taxes withheld from employees as well as the companies' matching portion as current liabilities until they are remitted.

True

Current liabilities are usually recorded and reported in financial statements at their full maturity value.

True

The fair value of an asset retirement obligation is recorded as both an increase to the related asset and a liability.

True

Which of the following taxes does not represent a payroll deduction a company may incur? A) State unemployment taxes. B) FICA taxes. C)State income taxes. D) Federal income taxes.

State unemployment taxes.

Included in Vernon Corp.'s liability account balances at December 31, 2012, were the following: 7% note payable issued October 1, 2012, maturing September 30, 2013 $250,000 8% note payable issued April 1, 2012, payable in six equal annual installments of $150,000 beginning April 1, 2013 600,000 Vernon's December 31, 2012 financial statements were issued on March 31, 2013. On January 15, 2013, the entire $600,000 balance of the 8% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2013, Vernon consummated a noncancelable agreement with the lender to refinance the 7%, $250,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. On the December 31, 2012 balance sheet, the amount of the notes payable that Vernon should classify as short-term obligations is A) $175,000. B) $50,000. C) $0. D) $125,000.

$0. Conceptual—both notes have been refinanced by long-term obligations.

Ermler Corporation has $1,800,000 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) $0 B) $800,000 C) $1,800,000 D) $1,000,000

$1,000,000 50,000 × $20 = $1,000,000.

On January 1, 2012, Beyer Co. leased a building to Heins Corp. for a ten-year term at an annual rental of $140,000. At inception of the lease, Beyer received $560,000 covering the first two years' rent of $280,000 and a security deposit of $280,000. This deposit will not be returned to Heins 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 $560,000 should be shown as a current and long-term liability, respectively, in Beyer's December 31, 2012 balance sheet? Current Liability Long-term Liability A) $280,000 $280,000 B) $280,000 $140,000 C) $0 $560,000 D) $140,000 $280,000

$140,000 $280,000

Mott Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Mott $3 each. Mott estimates that 40 percent of the coupons will be redeemed. Data for 2012 and 2013 are as follows: 2012 2013 Bags of dog food sold 500,000 600,000 Leashes purchased 18,000 22,000 Coupons redeemed 120,000 150,000 The premiums liability at December 31, 2012 is A) $30,000. B) $11,250. C) $26,250. D) $15,000.

$30,000. [(200,000 - 120,000) ÷ 8] × $3 = $30,000.

Which gives rise to the requirement to accrue a liability for the cost of compensated absences? A) Payment is probable. B) Employee rights vest or accumulate. C) Amount can be reasonably estimated. D) All of the above.

All of the above.

Which of the following is a condition for accruing a liability for the cost of compensation for future absences? A) The obligation relates to the rights that vest or accumulate. B) Payment of the compensation is probable. C) The obligation is attributable to employee services already performed. D) All of these are conditions for the accrual.

All of these are conditions for the accrual.

The ability to consummate the refinancing of a short-term obligation may be demon- stated by A) actually refinancing the obligation by issuing a long-term obligation after the date of the balance sheet but before it is issued. B) entering into a financing agreement that permits the enterprise to refinance the debt on a long-term basis. C)actually refinancing the obligation by issuing equity securities after the date of the balance sheet but before it is issued. d) All of these.

All of these.

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? A) Event is unusual in nature and event occurs infrequently. B) Amount of loss is reasonably estimable and occurrence of event is probable. C) Amount of loss is reasonably estimable and event occurs infrequently. D) Event is unusual in nature and occurrence of event is probable.

Amount of loss is reasonably estimable and occurrence of event is probable.

The amount of the liability for compensated absences should be based on 1. the current rates of pay in effect when employees earn the right to compensated absences. 2. the future rates of pay expected to be paid when employees use compensated time. 3. the present value of the amount expected to be paid in future periods. A) 1 B) 2 C) 3 D) Either 1 or 2 is acceptable.

Either 1 or 2 is acceptable.

Which of the following best describes the cash-basis method of accounting for warranty costs? A) Expensed based on estimate in year of sale. B) Expensed when warranty claims are certain. C) Expensed when incurred. D) Expensed when liability is accrued.

Expensed when incurred.

A short-term obligation can be excluded from current liabilities if the company intends to refinance it on a long-term basis.

False

Accumulated rights exist when an employer has an obligation to make payment to an employee even after terminating his employment.

False

Prepaid insurance should be included in the numerator when computing the acid-test (quick) ratio.

False

The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

False

What are compensated absences? A) Unpaid time off. B) A form of healthcare. C) Payroll deductions. D) Paid time off.

Paid time off.

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties. The amount of the loss involved can be reasonably estimated. Based on the above facts, an estimated loss contingency should be A) accrued. B) disclosed but not accrued. C) neither accrued nor disclosed. D) classified as an appropriation of retained earnings.

accrued.

Dean 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, an unfavorable outcome is highly probable, and A) the damages appear to be material. B) the cause for action occurred during the accounting period covered by the financial statements. C) the court will decide the case within one year. D) the Dean Company admits guilt.

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

A company buys an oil rig for $2,000,000 on January 1, 2012. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220). 10% is an appropriate interest rate for this company. What expense should be recorded for 2012 as a result of these events? A) Depreciation expense of $240,000 B) Depreciation expense of $215,420 and interest expense of $15,422 C) Depreciation expense of $200,000 and interest expense of $40,000 D) Depreciation expense of $200,000 and interest expense of $15,422

Depreciation expense of $215,420 and interest expense of $15,422 ($2.000,000 + $154,220) ÷ 10 = $215,420; $154,220 × .10 = $15,422.

Which of the following is an example of a contingent liability? A) Obligations related to product warranties. B) Tax loss carryforwards. C) Possible receipt from a litigation settlement. D) Pending court case with a probable favorable outcome.

Obligations related to product warranties.

Which of the following is not acceptable treatment for the presentation of current liabilities? A) Listing current liabilities according to amount. B) Listing current liabilities in order of maturity. 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.

Which of the following situations may give rise to unearned revenue? A) Providing trade credit to customers. B) Selling magazine subscriptions. C) Selling inventory. D) Providing manufacturer warranties.

Selling magazine subscriptions.

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) the number of financing institutions that refused to refinance the debt, if any. B) a general description of the financing arrangement. C) the terms of the new obligation incurred or to be incurred. D) the terms of any equity security issued or to be issued.

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