ACC 3313 Chapter 13

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 does not include interest. Noninterest-bearing notes incur interest. The face amount of noninterest-bearing notes includes interest.

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

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

Pensions Commissions Salaries

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. $45,000 [credit] deferred revenue. $45,000

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

commercial paper

Events occurring between the end of the fiscal year and the date the financial statements are issued or available to be issued should be

considered to clarify financial statement elements at the reporting date.

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

contingent loss

Generally, a current liability is expected to be satisfied from ___ ___.

current assets

Federal income taxes withheld by the employer on behalf of the employee are recorded as

current liabilities

Journal Entry for Noninterest-Bearing Note for Inventory

debit Inventory debit discount on notes payable credit notes payable

Journal Entry to record the sale of gift cards

debit cash credit deferred gift card revenue

Journal Entry for when refundable deposits are collected

debit cash credit liability - refundable deposits

Journal Entry for a Note issued for cash

debit cash credit notes payable

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

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

True or False: If a company intends to refinance a short-term liability on a long-term basis, the liability must be reported as current unless the company has consummated the refinancing agreement by the balance sheet date.

false

True or False: State and federal unemployment taxes are imposed on both employers and employees.

false

True or False: Stock dividends declared but not yet distributed are a reported as a liability until the stock is issued

false

The costs incurred to satisfy customer claims under an extended warranty period are recorded

in the same period as the warranty revenue

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

secured

Information relative to a loss contingency that becomes available after the fiscal year ends, but before the financial statement date (select all that apply) should be considered in estimating the amount of the loss. should be ignored since the information was not available until after the fiscal year end. should be considered in determining the probability of a loss contingency. cannot be considered in estimating the amount of loss because the information was not available until after year end.

should be considered in estimating the amount of the loss. should be considered in determining the probability of a loss contingency.

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

the warranty provides coverage over time.

Short-term obligations expected to be refinanced are not classified as current liabilities because

their satisfaction will not require the use of assets classified as current as of the balance sheet date

Which of the following is correct regarding gain contingencies? They are not accrued. They are accrued if it is probable that a gain will be realized. They are accrued if it is possible that a gain will be realized.

they are not accrued

formula for the effective interest rate

total amount of interest in total loan/amount actually received or borrowed to annualize multiply the percentage by 12/(# of months in note)

Extended warranty contracts provide

warranty protection beyond the manufacturer's original warranty.

What is pledging receivables?

when accounts receivable serves as a collateral

Revenue associated with the sale of gift cards normally is recognized

when the gift card is redeemed

Payroll related deductions examples

withholding taxes social security taxes employee insurance employee contributions to retirement plans union dues

If a company judges the likelihood that an unasserted claim will be asserted at a future date, it is probable the outcome will be unfavorable, and the related amount can be estimated, the company should:

accrue a contingent liability

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

accrued interest payable

A liability for compensated absences is

accrued only if specific conditions are met

Which of the following concepts or principles is the primary reason why gain contingencies are not accrued, even if they are probable? Relevance Conservatism Full disclosure Reliability

conservatism

An otherwise successful company may fail to exist, if it experiences serious _________ issues

liquidity

The current ratio measures

liquidity

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

Companies typically prefer to report an obligation as __________ than ______

noncurrent current

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

noninterest bearing note

A loss related to general or unspecified business risks is

not accrued

Liabilities are

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

Revenue related to extended warranty contracts typically is recognized

over time

Gain contingencies include

possible receipts of donations and bonuses. pending court cases where the probable outcome is favorable. tax loss carryforwards.

True or False: Gain contingencies are not recorded.

true

True or False: The acid-test ratio excludes inventory from the calculation.

true

True or False: The entry to record the collection of sales tax by a retailer may include credits to both Sales Revenue and Sales Tax Payable.

true

The feature that distinguishes loss contingencies from other liabilities is the

uncertainty that a loss will occur

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

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

Seine Company, a trucking company, accidentally spilled a load of ice cream across an open field. The owner of the field has not yet demanded clean-up of the spill. Seine's expert source predicts that it is probable that the owner will file a claim and that Seine will probably have to pay for the clean-up cost of approximately $29,000. Upon determining these facts, Seine should

recognize a contingent liability of $29,000.

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

remote reasonably possible probable

Current liabilities are defined as obligations whose liquidation is reasonably expected to

require use of current assets or creation of other current liabilities.

Costs incurred to satisfy customer claims under an extended warranty period are recorded during the same period as the related _________

sale

Sales Tax Payable formula

(federal % + state %) * sale price

Four Conditions for accrual of paid future absences

1. The obligation is attributable to employees services already preformed 2. The paid absence can be taken in a later year - the benefit vests or the benefit can be accumulated over time 3. Payment is probable 4. The amount can be reasonably estimated

What are the three characteristics of liabilities?

1. probable, future sacrifices of economic benefits 2. arise from present obligations 3. result from past transactions or events

Whether a contingency is accrued and reported as a liability depends on

1. the likelihood that the confirming event will occur 2. What can be determined about the amount of loss

What are the three characteristics of current liabilities?

1.obligation payable within one year or firm's operating cycle 2. satisfied from current assets 3. satisfied by creation of other current liabilities

What practical reason may motivate companies to rarely accrue losses for ongoing litigation?

Accrual of a contingent loss may adversely affect the outcome of the company's legal case.

Which of the following is correct regarding accrued interest payable? Accrued interest payable relates to interest already incurred but not yet paid. Accrued interest payable relates to interest that was prepaid but not yet incurred. Accrued interest payable relates to interest that was neither paid nor incurred.

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

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.

Best Equipment Inc. sells its products with a 3-year limited warranty. During the current year, 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 the current year.

If risk were deemed remote and someone disagrees with that finding, what is a potential outcome?

Class action lawsuit

Collections for Third Parties

Collections made from customers or employees and remitted periodically to the appropriate third parties

The acid-test ratio relates total current liabilities to

cash, short term investments and net receivables

Which of the following are classified as current liabilities? (Select all that apply.) Notes payable due in two years that require monthly interest payments All long-term loans with debt covenants 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

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

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.

What is factoring receivables?

Factoring is a transfer of receivables to a third party (a factor) who assumes the responsibility of collection.

In accounting for short-term debt expected to be refinanced to long-term debt:

IFRS uses the financial statement date to determine classification of short-term debt to be refinanced.

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

Income tax payable Interest payable Wages and salaries payable

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

Identify a primary reason why financial statement users assess a company's liquidity.

Lack of liquidity can lead to the demise of a company that otherwise may have been successful.

Which of the following transactions will increase a company's working capital? Purchase of inventory on account Collection of an accounts receivable balance Receipt of cash on a short-term note Receipt of cash on a long-term note Payment of an accounts payable

Receipt of cash on a long-term note

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

Which taxes are included in employer payroll taxes?

State unemployment taxes. F.I.C.A. taxes. Federal unemployment taxes.

Which of the following represents the formal credit instrument for an accounts payable? Purchase order Commercial paper Supplier's invoice Promissory note

Supplier's Invoice

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: (Select all that apply.) 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. 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 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

A large anticipated insurance recovery is reported as

a disclosure only

In practice, accrual of loss contingencies related to litigation claims are uncommon because (select all that apply) it may adversely affect the outcome of the litigation. it may positively affect the outcome of the litigation. outcome related to litigation is easily estimated. the outcome related to litigation is highly uncertain.

it may adversely affect the outcome of the litigation. the outcome related to litigation is highly uncertain.

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

What are accrued liabilities?

liabilities that have been incurred but not yet paid

Unredeemed cash rebates related to current year sales should be estimated and the amount treated as a(n): (Select all that apply.) note disclosure liability expense reduction in revenue 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 when the customer returns the equipment. Upon receipt of the deposit, Growler should credit a

liability—refundable deposits.

On October 1, Eder Fabrication borrowed $60 million and issued a nine-month 12% promissory note. Interest was payable at maturity. Prepare the journal entry for the issuance of the note and the appropriate adjusting entry for the note at December 31, the end of the reporting period, and the entry for when the note is satisfied.

10/1 [DR] Cash $60M [CR] Notes Payable $60M 12/31 [DR] Interest Expense. $1.8M [CR] Interest Payable. $1.8M 6/1 [DR] Notes Payable. $60M [DR] Interest Payable $1.8M [DR] Interest Expense $3.6M [CR] Cash $65.4M for 12/31: 60M x 12% x 3/12 months = 1.8M (amount x interest x time) total interest: 60M x 12% x 9/12 months

On October 1, Dutta Incorporated borrowed $100M and issued a one-year promissory note. Interest was discounted at issuance at a 12% discount rate. Dutta will receive only $88M in cash on October 1 but will pay $100M, face amount of the note, one year later. Prepare the journal entry for the issuance of the note, the appropriate adjusting entry for the note at December 31, and the entry for when the note is satisfied. What is the effective interest rate in this transaction?

10/1 [DR] Cash $88M [DR] discount on Notes Payable $12M [CR] Notes Payable $100M 12/31 [DR] Interest Expense. $3M [CR] discount on Notes Payable $3M 10/1 [DR] Notes Payable. $100M [DR] Interest Expense $9M [CR] Cash $100M [CR] discount on Notes Payable $9M to find total discount: 100-88 = 12, 12/12 = 1M per month effective interest rate = total interest in year / amount borrowed or received 12M/88M = 13.64%

Supreme Inc. sells its products with a 3-year warranty. The company estimates warranty costs relating to sales during the current year 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 warranty expense that Supreme should recognize in its current year income statement?

50,000 Reason: The full amount is recognized in the year of sale to match the expense with the related revenue.

Which of the following are essential characteristics of a liability? (Select all that apply.) A future sacrifice of an economic benefit is probable. The future sacrifice arises from a present obligation. The obligation results from a past event. The future sacrifice is certain and can be reliably measured. The future sacrifice arises from a written contract.

A future sacrifice of an economic benefit is probable. The future sacrifice arises from a present obligation. The obligation results from a past event.

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 $540,000 A current liability of $36,000 A noncurrent liability of $540,000

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

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

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

identify the statement that best describes the discriminating definition for classifying a liability as current. The liability is expected to be satisfied within 1 year. The liability is expected to be satisfied from current assets. The liability is expected to be satisfied before the end of the current fiscal period.

The liability is expected to be satisfied from current assets.

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. The loss must arise from a legal dispute that is not yet resolved. The loss must arise from a company's normal operations.

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

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.

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

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

Which of the following statements is correct regarding short-term obligations? They can be classified as long-term liabilities if the company has a high credit rating. They must always be classified as short-term liabilities. They may be classified as long-term liabilities if they meet certain criteria.

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

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. Insurance premiums paid for the following period. Unpaid interest relating to the past few months. Interest associated with a loan signed today.

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

What is a secured loan?

a loan made by pledging a specified asset of the borrower as collateral or security

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

What is a loss contingency?

an existing, uncertain situation involving potential loss depending on whether some future event occurs

An interest rate, unless otherwise specified, is typically a(n) _______ rate

annual

Accrued liabilities are disclosed in the financial statements by

appropriately classifying them as regular liabilities on the balance sheet

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

are offered on open account. are noninterest-bearing.

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

before the financial statement date

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

compensation

Journal Entry for when deferred revenue is collected

debit cash credit deferred subscription revenue

Journal Entry to account for sales tax

debit cash or A/R credit sales revenue credit sales tax payable

Journal Entry to record expiration of gift cards

debit deferred gift card revenue credit revenue - gift cards

Journal Entry to record redemption of gift cards

debit deferred gift card revenue credit revenue - gift cards

Journal Entry for when deferred revenue has been satisfied

debit deferred subscription revenue credit subscription revenue

Journal Entry for accrual of interest on a note

debit interest expense credit interest payable

Journal Entry for satisfaction of note issued for cash

debit interest expense debit notes payable credit cash

Journal Entry for satisfaction of noninterest-bearing note for inventory

debit interest expense debit notes payable credit discount on notes payable credit cash

Journal Entry for when refundable deposits are forfeited

debit liability - refundable deposits credit revenue - sale of containers

Journal Entry for when refundable deposits are satisfied example: when the container that the deposit was for is returned

debit liabitily - refundable deposits credit cash complete opposite of when deposits are collected, different number would likely be a % of the total deposits collected or a number given

Journal Entry for when a loss contingency is accrued as a liability

debit loss (for expense) credit liability (for expense)

Journal Entry for when loss contingency is resolved using a noncash asset

debit loss (for expense) credit asset (for valuation account)

Glocken Company is trying to increase its share of the consumer electronics market. To stimulate sales, the company offers cash rebates ranging from $25-$50 on all of its products. At December 31 of the current year, the company estimates that during the following year, customers will redeem $2,550 in rebates relating to current year sales. On December 31, of the current year, Glocken should

decrease revenue and recognize a liability for $2,550.

cash received for sale of a gift card is recorded as

deferred revenue

When interest is discounted from the face amount of a note, the ________ ________ ______ is higher than the ________ _________ _____

effective interest rate stated discount rate

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

formula to calculate the amount of interest

face amount x annual rate x time to maturity

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

future past

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

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