Intermediate Accounting I: Current Liabilities & Contingencies (Chapter 13)

To record an asset retirement obligation (ARO), the cost associated with the ARO is:

included in the carrying amount of the related long-lived asset.

Which of the following statements is false?

FICA taxes withheld from employees' payroll checks should never be recorded as a liability since the employer will eventually remit the amounts withheld to the appropriate taxing authority.

Which of these is not included in an employer's payroll tax expense?

Federal income taxes

Which of the following does not demonstrate evidence regarding the ability to consummate a refinancing of short-term debt?

Management indicated that they are going to refinance the obligation.

Liabilities are:

obligations arising from past transactions and payable in assets or services in the future.

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's:

portion of FICA taxes and any voluntary deductions.

Purchase Retailer made cash sales during the month of October of $221,000. The sales are subject to a 6% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sale transactions?

Credit Sales Taxes Payable for $13,260.

Which of the following is a characteristic of the expense warranty approach, but not the sales warranty approach?

Estimated liability under warranties.

Which of the following is a current liability?

None of these -- A long-term debt maturing currently to be paid with current assets is a current liability.

The ratio of current assets to current liabilities is called the:

current ratio.

Each of the following are included in both the current ratio and the acid-test ratio except:

inventory.

A contingent liability:

is the result of a loss contingency.

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.

All of these are conditions for the accrual.

Which of the following items is a current liability?

Bonds (for which there is an adequate appropriation of retained earnings) due in eleven months.

Where is debt callable by the creditor reported on the debtor's financial statements?

Current liability.

A company has not declared a dividend on its cumulative preferred stock for the past three years. What is the required accounting treatment or disclosure in this situation?

Disclose the amount of the dividends in arrears.

Which of the following is a characteristic of a current liability but not a long-term liability?

Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

What are compensated absences?

Paid time off.

What is a discount as it relates to zero-interest-bearing notes payable?

The discount represents the cost of borrowing.

When is a contingent liability recorded?

When the future events are probable to occur and the amount can be reasonably estimated.

Stock dividends distributable should be classified on the:

balance sheet as an item of stockholders' equity.

The numerator of the acid-test ratio consists of:

cash, marketable securities, and net receivables.

Among the short-term obligations of Lance Company as of December 31, the balance sheet date, are notes payable totaling $250,000 with the Madison National Bank. These are 90-day notes, renewable for another 90-day period. These notes should be classified on the balance sheet of Lance Company as:

current liabilities.

What is the relationship between current liabilities and a company's operating cycle?

Liquidation of current liabilities is reasonably expected within the company's operating cycle (or one year if less).

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

Subsequently refinance the obligation on a long-term basis.

Which of the following is not true about the discount on short-term notes payable?

The Discount on Notes Payable account should be reported as an asset on the balance sheet.

How do you determine the acid-test ratio?

The sum of cash, short-term investments and net receivables divided by current liabilities.

Which of the following are not factors that are considered when evaluating whether or not to record a liability for pending litigation?

The type of litigation involved.

Why is the liability section of the balance sheet of primary importance to bankers?

To assist in understanding the entity's liquidity.

Jeff Beck is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2012, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Beck had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land. The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Beck in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Beck appears inclined to accept the Railroad's offer. The Railroad's 2012 financial statements should include the following related to the incident:

recognition of a loss and creation of a liability for the value of the land.

Use of the accrual method in accounting for product warranty costs:

represents accepted practice and should be used whenever the warranty is an integral and inseparable part of the sale.

Of the following items, the only one which should not be classified as a current liability is:

short-term obligations expected to be refinanced.

Which of the following taxes does not represent a common payroll deduction?

State unemployment taxes.

Which of the following is true about accounts payable? 1. Accounts payable should not be reported at their present value. 2. When accounts payable are recorded at the net amount, a Purchase Discounts account will be used. 3. When accounts payable are recorded at the gross amount, a Purchase Discounts Lost account will be used.

1. Accounts payable should not be reported at their present value.

The effective interest on a 12-month, zero-interest-bearing note payable of $300,000, discounted at the bank at 8% is:

8.70%.

What condition is necessary to recognize an asset retirement obligation?

Company has an existing legal obligation and can reasonably estimate the amount of the liability.

Which of the following is a current liability?

A cash dividend payable to preferred stockholders.

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.

All of the above.

Which of the following may be a current liability? a. Withheld Income Taxes b. Deposits Received from Customers c. Deferred Revenue

All of these

Which of the following should not be included in the current liabilities section of the balance sheet? a. Trade notes payable b. Short-term zero-interest-bearing notes payable c. The discount on short-term notes payable

All of these are included

Which of the following contingencies need not be disclosed in the financial statements or the notes thereto? a. Probable losses not reasonably estimable b. Environmental liabilities that cannot be reasonably estimated c. Guarantees of indebtedness of others

All of these must be disclosed.

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

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

What is a contingency?

An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.

Which of the following is the proper way to report a gain contingency?

As a disclosure only.

In March 2013, an explosion occurred at Kirk Co.'s plant, causing damage to area properties. By May 2013, no claims had yet been asserted against Kirk. However, Kirk's management and legal counsel concluded that it was reasonably possible that Kirk would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Kirk's $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Kirk's December 31, 2012 financial statements, for which the auditor's fieldwork was completed in April 2013, how should this casualty be reported?

As a note disclosing a possible liability of $400,000.

CalCount pays a weekly payroll of $170,000 that includes federal taxes withheld of $25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the effect of assets and liabilities from this transaction?

Assets decrease $110,820 and liabilities increase $59,180.

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.

Either 1 or 2 is acceptable.

Recycle Exploration is involved with innovative approaches to finding energy reserves. Recycle recently built a facility to extract natural gas at a cost of $15 million. However, Recycle is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $21 million (the present value of which is $8 million). What is the journal entry required to record the asset retirement obligation?

Debit Natural Gas Facility for $8,000,000 and credit Asset Retirement Obligation for $8,000,000.

CalCount provides its employees two weeks of paid vacation per year. As of December 31, 65 employees have earned two weeks of vacation time to be taken the following year. If the average weekly salary for these employees is $1,140, what is the required journal entry?

Debit Salaries and Wages Expense for $148,200 and credit Salaries and Wages Payable for $148,200.

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?

Depreciation expense of $215,420 and interest expense of $15,422

A company buys an oil rig for $3,000,000 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 $600,000 (present value at 10% is $231,330). 10% is an appropriate interest rate for this company. What expense should be recorded for 2012 as a result of these events?

Depreciation expense of $323,133 and interest expense of $23,133

Which of the following best describes the accrual method of accounting for warranty costs?

Expensed based on estimate in year of sale.

Which of the following best describes the cash-basis method of accounting for warranty costs?

Expensed when incurred.

Which of the following is not considered a part of the definition of a liability?

Liquidation is reasonably expected to require use of existing resources classified as current assets or create other current liabilities.

Tender 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 $500,000. What is the required journal entry as a result of this litigation?

No journal entry is required.

An account which would be classified as a current liability is:

None of these -- accounts payable, wages payable, etc. would be examples of current liability.

Which of the following statements is correct? a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis. b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing. c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued.

None of these -- the company must both intend to refinance the obligation on a long-term basis and demonstrate the ability to consummate the refinancing to exclude a short-term obligation from current liabilities.

Which of the following is an example of a contingent liability?

Obligations related to product warranties.

Which of the following is not acceptable treatment for the presentation of current liabilities?

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

Which of the following terms is associated with recording a contingent liability?

Probable.

Ortiz Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2012. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Ortiz recall all cans of this paint sold in the last six months. The management of Ortiz estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

Operating expense of $800,000 and liability of $800,000

What is the relationship between present value and the concept of a liability?

Present values are used to measure certain liabilities.

Which of the following is not a correct statement about sales taxes?

Sales taxes are an expense of the seller.

Which of the following situations may give rise to unearned revenue?

Selling magazine subscriptions.

Under what conditions is an employer required to accrue a liability for sick pay?

Sick pay benefits vest.

What does the current ratio inform you about a company?

The company's liquidity.

An electronics store is running a promotion where for every video game purchased, the customer receives a coupon upon checkout to purchase a second game at a 50% discount. The coupons expire in one year. The store normally recognized a gross profit margin of 40% of the selling price on video games. How would the store account for a purchase using the discount coupon?

The difference between the cost of the video game and the cash received is recognized as premium expense.

Winter 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. Winter's lawyer states that it is probable that Winter will lose the suit and be found liable for a judgment costing Winter anywhere from $1,600,000 to $8,000,000. However, the lawyer states that the most probable cost is $4,800,000. As a result of the above facts, Winter should accrue:

a loss contingency of $4,800,000 and disclose an additional contingency of up to $3,200,000.

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:

accrued.

The ability to consummate the refinancing of a short-term obligation may be demon- strated 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.

all of these

Accrued liabilities are disclosed in financial statements by:

appropriately classifying them as regular liabilities in the balance sheet.

A liability for compensated absences such as vacations, for which it is expected that employees will be paid, should:

be accrued during the period when earned.

Glaus Corp. signed a three-month, zero-interest-bearing note on November 1, 2012 for the purchase of $250,000 of inventory. The face value of the note was $253,675. Assuming Glaus used a "Discount on Note Payable" account to initially record the note and that the discount will be amortized equally over the 3-month period, the adjusting entry made at December 31, 2012 will include a:

debit to Interest Expense for $2,450.

Assume that a manufacturing corporation has (1) good quality control, (2) a one-year operating cycle, (3) a relatively stable pattern of annual sales, and (4) a continuing policy of guaranteeing new products against defects for three years that has resulted in material but rather stable warranty repair and replacement costs. Any liability for the warranty:

should be reported as part current and part long-term.

A contingency can be accrued when:

the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability incurred.

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:

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

Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be:

the minimum of the range.

Neer Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be:

the minimum of the range.

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:

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

In accounting for compensated absences, the difference between vested rights and accumulated rights is:

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

A company is legally obligated for the costs associated with the retirement of a long-lived asset:

whether it hires another party to perform the retirement activities or performs the activities itself.