CHAPTER 13 - Difficult

On December 31, 2011, Bollinger Co. has $3,000,000 of short-term notes payable due on February 14, 2012. On January 10, 2012, Bollinger arranged a line of credit with Compass Bank which allows Bollinger to borrow up to $1,800,000 at one percent above the prime rate for three years. On February 3, 2012, Bollinger borrowed $1,800,000 from Compass Bank and used $800,000 additional cash to liquidate $2,600,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as a current liability on the December 31, 2011 balance sheet which is issued on March 2, 2012 is: $400,000. $800,000. $1,200,000. $0.

$1,200,000. The correct amount is ($3,000,000 - $1,800,000) $1,200,000.

Jax Company offers a cash rebate of $2 on each $20 package of product sold during 2012. Historically, 25% of customers mail in the rebate form. During 2012, 5,000,000 packages are sold, and 750,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2012 financial statements? $2,500,000; $1,000,000 $1,500,000; $1,500,000 $1,500,000; $1,000,000 $2,500,000; $1,500,000

$2,500,000; $1,000,000 The expense is 5,000,000 packages X 25% X $2 per package or $2,500,000. Since 750,000 $2 rebates were mailed in during 2012, the liability balance is ($2,500,000 - $1,500,000) $1,000,000.

Wilton Company offers a cash rebate of $.50 on each $3 package of product sold during 2012. Historically, 20% of customers mail in the rebate form. During 2012, 2,000,000 packages are sold, and 110,000 $.50 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2012 financial statements dated December 31? $200,000; $145,000 $200,000; $55,000 $55,000; $145,000 $55,000; $200,000

$200,000; $145,000 The expense is 2,000,000 packages X 20% X $.50 per package or $200,000. Since 110,000 $.5 rebates were mailed in during 2012, the liability balance is ($200,000 - $55,000) $145,000.

In 2011, General Devices Corporation began selling a new line of products that carries a two-year warranty against defects. Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows: First year of warranty 2% Second year of warranty 5% Sales and actual warranty expenditures for 2009 and 2010 are presented below: 2011 Sales - $600,000 2012 Sales - $800,000 Actual warranty expenditures 2011 20,000 2012 40,000 What is the estimated warranty liability at the end of 2012? $38,000. $98,000. $58,000. $16,000.

$38,000. {[$600,000 X (2% + 5%)] + [$800,000 X (2% + 5%)]} - ($20,000 + $40,000) equals $38,000.

Which of the following is included in employer payroll taxes? State unemployment taxes. All of the above. F.I.C.A. taxes. Federal unemployment taxes.

All of the above. The employer is responsible for paying a matching payment for F.I.C.A. taxes and for the unemployment taxes.

Gain contingencies include all of the following except: All of the options are gain contingencies. possible receipts of donations and bonuses. tax loss carryforwards. pending court cases where the probable outcome is favorable.

All of the options are gain contingencies. Gain contingencies include all of the options.

Which of the following factors need not be considered in determining whether a liability should be recorded with respect to pending or threatened litigation? The time period in which the cause of action occurred. The probability of an unfavorable outcome. The ability to make a reasonable estimate of the loss. All of the options must be considered.

All of the options must be considered. All of the options are factors that must be considered in determining whether a liability should be recorded.

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

Amount of loss is reasonably estimable and occurrence of event is probable. Loss contingencies are accrued with the amount of the loss is reasonably estimable and the occurrence of the event is probable.

Which of the following is the proper way to report a gain contingency? As deferred revenue. As an account receivable with additional disclosure explaining the nature of the contingency. As a disclosure only. As an accrued amount.

As a disclosure only. The proper way to report a gain contingency is as a disclosure only

Which of these is not included in an employer's payroll tax expense? State unemployment taxes F.I.C.A. (social security) taxes Federal income taxes Federal unemployment taxes

Federal income taxes Federal income taxes are not included in an employer's payroll tax expense.

The current ratio measures which of the following? Liquidity. All of the above. Solvency. Profitability.

Liquidity. The current ratio is a measure of a firm's ability to meet its currently maturing debt.

Gain contingencies are recorded when None of these. the amount of the gain can be reasonably estimated. it is probable that a benefit will be received. Both when it is probable that a benefit will be received and the amount of the gain can be reasonably estimated.

None of these. Gain contingencies are never recorded.

Which of the following is not acceptable treatment for the presentation of current liabilities? Listing current liabilities in order of maturity. Offsetting current liabilities against assets that are to be applied to their liquidation. Listing current liabilities according to amount. Showing currently maturing long-term debt as part of current liabilities.

Offsetting current liabilities against assets that are to be applied to their liquidation. Offsetting current liabilities against assets that are to be applied to their liquidation is not proper presentation of current liabilities.

Which of the following is not one of the requirements for accruing the cost of compensated absences? The employee's services must have already been rendered. The obligation relates to rights that vest or accumulate. The amount can be reasonably estimated. Payment of the compensation is possible.

Payment of the compensation is possible. Payment must be probable.

Which of the following is not an example of a current liability? Dividends Payable. Sales Taxes Payable. Preferred dividends in arrears. Unearned Revenue.

Preferred dividends in arrears. Preferred dividends in arrears are not a liability until declared by the Board of Directors.

Which of the following statements is false? The liability for compensated absences should be recognized in the year earned. Profit-Sharing Bonus Payable is usually recognized as a long-term liability. Vested rights exist when an employer has an obligation to make payment to an employee. Unemployment taxes are paid by the employer.

Profit-Sharing Bonus Payable is usually recognized as a long-term liability. Profit-Sharing Bonus Payable is usually recognized as a current liability.

When retailers collect sales taxes from customers, the taxes collected are recorded as: Sales Taxes Payable. Unearned Sales Taxes Revenue. Sales or Sales Taxes Payable. Sales.

Sales or Sales Taxes Payable. Sales taxes collected by retailers can be recorded as either Sales or Sales Taxes Payable.

Which of the following statements is false? A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis and demonstrates an ability to complete the refinancing. Cash dividends should be recorded as a liability when they are declared by the board of directors. Unearned revenues represent advance payments for goods or services from customers. Stock dividends are a reported as a liability until paid.

Stock dividends are a reported as a liability until paid. Stock dividends are not a liability.

Which of the following is not true about the discount on short-term notes payable? The Discount on Notes Payable account has a debit balance. The Discount on Notes Payable account should be reported as an asset on the balance sheet. The amortization of Discount on Notes Payable increases interest expense. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.

The Discount on Notes Payable account should be reported as an asset on the balance sheet. The Discount on Notes Payable account should NOT be reported as an asset on the balance sheet.

Halliburton Co. is being sued by former employees as a result of negligence on the company's part in permitting them to be exposed to highly toxic chemicals in its plant without providing proper safeguards. Halliburton's lawyers state that it is probable that the company will lose the suit and be found liable for a judgment costing the company anywhere from $10,500,000 to $36,000,000. However, the lawyer states that the most probable cost is $25,500,000. As a result of the above facts, Bailey should accrue no loss contingency but disclose a contingency of $10,500,000 to $36,000,000. a loss contingency of $25,500,000 and disclose an additional contingency of up to $10,500,000. a loss contingency of $25,500,000 butnotdisclose any additional contingency. a loss contingency of $10,500,000 and disclose an additional contingency of up to $25,500,000.

a loss contingency of $25,500,000 and disclose an additional contingency of up to $10,500,000. Because a loss of $25,500,000 is more likely than any other amount in the range, Halliburton should accrue $25,500,000 and disclose the potential additional loss of $10,500,000.

A liability for compensated absences is: disclosed in a note only. accrued under all conditions. accrued only if specific conditions are met. never accrued but may be disclosed if desired.

accrued only if specific conditions are met. A liability for compensated absences should be accrued if specific conditions are met.

Accrued liabilities are disclosed in the financial statements by appropriately classifying them as regular liabilities in the balance sheet. a footnote to the statements. showing the amount among the liabilities but not extending it to the liability total. an appropriation of retained earnings.

appropriately classifying them as regular liabilities in the balance sheet. Accrued liabilities are disclosed in the financial statements by appropriately classifying them as regular liabilities in the balance sheet.

Long-term debts maturing currently should be included as a current liability if they are or will be: retired by use of noncurrent assets. converted into capital stock. due on demand. refinanced with the proceeds of a new debt issue.

due on demand. Long-term debts due on demand should be classified as a current liability.

Most corporations make quarterly tax payments based on: estimated total annual tax liability. actual taxable income for the quarter. estimated taxable income for the quarter. actual annual tax liability.

estimated total annual tax liability. Quarterly tax payments should be made based on estimated total annual tax liability.

Employer payroll taxes include all of the following except: federal unemployment taxes. federal income taxes. FICA taxes. state unemployment taxes.

federal income taxes. Employer payroll taxes include all of the options except federal income taxes.

A company can exclude a short-term obligation from current liabilities if it: intends to refinance the obligation on a long-term basis and demonstrates an ability to consummate the refinancing. intends to refinance the obligation on a long-term basis. demonstrates an ability to consummate the refinancing. pays off the obligation after the balance sheet date and subsequently replaces it with long-term debt before the balance sheet is issued.

intends to refinance the obligation on a long-term basis and demonstrates an ability to consummate the refinancing. Short-term obligations can be excluded from current liabilities if the company has both the intent and the ability to consummate the refinancing.

A contingent liability is not disclosed in the financial statements. is accrued even though not reasonably estimated. definitely exists as a liability but its amount and due date are indeterminable. is the result of a loss contingency.

is the result of a loss contingency. A contingent liability is the result of a loss contingency.

Sales taxes collected from customers are recorded by retailers as: revenues. unearned revenues. receivables. liabilities.

liabilities. They are reported as liabilities because the retailer is acting as the collection agent for the government.

Current liabilities are usually recorded in the accounting records and reported in financial statements at their present value. carrying value. face value. maturity value.

maturity value. Current liabilities are usually recorded and reported at their maturity value.

A loss related to general or unspecified business risks is: always accrued. usually accrued. not accrued. sometimes accrued.

not accrued. 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. any accounts having credit balances after closing entries are made. obligations to transfer ownership shares to other entities in the future. deferred credits that are recognized and measured in conformity with generally accepted accounting principles.

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

When a zero-interest-bearing note is issued, the borrower receives the: present value of the note. maturity value of the note. None of the above. face value of the note.

present value of the note. The borrower receives the present value of the note because the interest has already been deducted.

Current liabilities are defined as obligations whose liquidation is reasonably expected to: require the distribution of cash. require use of current assets. require use of current assets or creation of other current liabilities. be paid within a year.

require use of current assets or creation of other current liabilities. Current liabilities are obligations whose liquidation will require use of current assets or creation of other current liabilities.

The acid-test ratio relates total current liabilities to cash: short-term investments, and receivables. and receivables. and short-term investments. receivables, and inventory.

short-term investments, and receivables. The acid-test ratio is computed by dividing the sum of cash, short-term investments, and receivables by current liabilities.

All of the following are typically classified as current liabilities except: current maturities of long-term debt. returnable deposits. unearned revenues. stock dividends distributable.

stock dividends distributable. Stock dividends distributable is not a liability.

Schoenthaler 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 maximum of the range. zero. the minimum of the range. the mean of the range.

the minimum of the range. If no other amount within a range for a loss contingency is more likely than any other amount, the minimum of the range is accrued.

Short-term obligations expected to be refinanced are not classified as current liabilities because: the obligations will be satisfied before the financial statements are issued. their satisfaction will not require the use of assets classified as current as of the balance sheet date. None of the above. they will be paid by the balance sheet date.

their satisfaction will not require the use of assets classified as current as of the balance sheet date. Because these obligations will not require the use of working capital during the next year (or operating cycle), they are not classified as current liabilities.