ACTY 3110 Ch. 13 SB

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.

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

Conservatism

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.

Accrued liabilities relate to expenses that were _____, but not yet ____.

already incurred; paid

Warranties that assure the customer that the products are delivered free from major defects typically result in the accrual of

contingent liabilities

The dollar amount of a potential loss when reporting a ___ ___ can be classified as either known, reasonably estimable, or not reasonably estimable.

contingent liability

When some doubt exists about whether or not a loss will occur in the future we refer to it as a(n)

contingent liability

Taxes collected for taxing authorities are recognized as

liabilities.

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

Current liabilities are those obligations that are payable within one year or the ____, whichever is ____.

operating cycle; longer

The feature that distinguishes loss contingencies from other liabilities is the

uncertainty that a loss will occur.

Revenue associated with the sale of gift cards normally is recognized

when the gift cards are redeemed

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.

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.

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

Which of the following transactions require the recognition of a liability? (Select all that apply.)

- Collection of a refundable deposit from a customer. - Receipt of payment for a service performed next month.

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 are classified as current liabilities? (Select all that apply.)

- 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

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 probable.

Karin Company's loan is due on July 1, 2018. What conditions must Karin meet (at a minimum) so that the note can be classified as a long-term liability on the company's balance sheet at December 31, 2017? (Select all that apply.)

- The company must have demonstrated the ability to refinance the obligation on a long-term basis. - The company must intend to refinance the obligation on a long-term basis.

Which of the following are essential characteristics of a liability? (Select all that apply.)

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

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. - Receipt of inventory purchases on account.

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 long-term bonds payable of $1 million. - a current bonds payable of $1 million.

Accounts payable typically (Select all that apply.)

- are noninterest-bearing. - are offered on open account.

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.

Which of the following is correct regarding accrued interest payable?

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

Sally Company owes its employees $5,250 for the last 4 days of the year ended December 31. The company will pay this amount on January 7 as part of its regular payroll disbursements of $11,800. What, if anything, should Sally recognize on December 31?

An accrued liability of $5,250.

Newman Company has both a contingent gain and a contingent loss that it judges to be highly probable to result in future cash flows, which it is able to reasonably estimate. Which of the following should the company accrue for the current accounting period?

Contingent loss only

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.

Higher risk = Current liabilities already reported on balance sheet Lower risk = Noncurrent liabilities already reported on the balance sheet

Obligations to suppliers of merchandise and obligations for services purchased on open account are referred to as

accounts payable

Match the terms with the correct description.

Probable = Confirming event is likely to occur Reasonably possible = The chance that the confirming event will occur is more than remote but less than likely Remote = The chance that the confirming event will occur is slight

Which of the following transactions will increase a company's working capital?

Receipt of cash on a long-term note

Which of the following represents the formal credit instrument for an accounts payable?

Supplier's invoice

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.

Which of the following is correct regarding gain contingencies?

They are not accrued.

Which of the following statements is correct regarding short-term obligations?

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

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.

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

Which of the following is not a category used to assess the likelihood of a loss contingency?

certain

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

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.

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

future; past

Amounts received that will be returned or remitted to others at a future date are recognized as:

liabilities

Cash collected from customers as refundable deposits or as advance payments for products or services are recognized as

liabilities.