Intermediate Chapter 13+14

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*Ex. 14-125—Accounting for troubled debt. (a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a settlement of troubled debt which includes the transfer of noncash assets? (b) What are the general rules for measuring and recognizing a gain and for recording future payments by the debtor in a troubled debt restructuring?

*Solution 14-125 (a) If the settlement of debt includes the transfer of noncash assets, a gain is measured by the debtor as the difference between the fair value of the assets transferred and the carrying amount of the debt, including accrued interest. The debtor also recognizes a gain or loss on the disposal of assets as the difference between the fair value of the assets transferred and their book value. (b) If the carrying amount of the payable is greater than the undiscounted total future cash flows, the gain is measured by the debtor as the difference between the carrying amount and the future cash flows. Future payments reduce the principal; no interest expense is recorded by the debtor. If the carrying amount of the payable is less than the future cash flows, no restructuring gain is recognized by the debtor. A new effective-interest rate is calculated that equates the present value of the future cash flows with the carrying amount of the debt. A part of the future cash flows is recorded as interest expense by the debtor.

Provisions are only recorded if it is likely that the company will have to settle an obligation at some point in the future.

Short-term debt obligations are classified as current liabilities unless an agreement to refinance is completed before the financial statements are issued.

The cash paid for interest will always be greater than interest expense when using effectiveinterest amortization for a bond.

The interest rate written in the terms of the bond indenture is called the effective yield or market rate.

Briefly describe some of the differences between GAAP and IFRS with respect to the accounting for long-term liabilities.

IFRS and GAAP have similar definitions for liabilities. Although the two standards are quite similar with respect to treatment of current liabilities, there are a few differences in the treatment of long-term liabilities: (1) Under GAAP and under IFRS, bond issue costs are netted against the carrying amount of the bonds. (2) GAAP has developed specific guidelines for debt restructuring and terms it as "trouble-debt restructurings" however IFRS assumes that all restructurings will be accounted for as extinguishments of debt. (3) Under IFRS, companies do not use premium or discount accounts but instead show the bond at its net amount. (4) GAAP permits the use of straight-line method of amortization for bond discount or premium in cases where the amount recorded is not materially different from effective-interest amortization. However IFRS allows only effective-interest method.

The ratio of current assets to current liabilities is called the

a. current ratio.

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

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

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

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

A loss contingency can be accrued when

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

IFRS requires bond issue costs:

c. to be netted against the carrying amount of the bonds.

The debt to assets ratio is computed by dividing

c. total liabilities by total assets.

The generally accepted method of accounting for gains or losses from the early extinguishment of debt treats any gain or loss as

d. a difference between the reacquisition price and the net carrying amount of the debt which should be recognized in the period of redemption.

Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the reporting of debt on the balance sheet.

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

The covenants and other terms of the agreement between the issuer of bonds and the lender are set forth in the

a. bond indenture.

Contingent assets are not reported in the statement of financial position.

Contingent liabilities are not reported in the financial statements but may be disclosed in the notes to the financial statements if the likelihood of an unfavorable outcome is possible.

The stated rate is the same as the coupon rate.

Which of the following 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 these answers are correct. Answer: D

BE. 13-147—Notes payable. On August 31, Latty Co. partially refunded $900,000 of its outstanding 10% note payable made one year ago to Dugan State Bank by paying $900,000 plus $90,000 interest, having obtained the $990,000 by using $262,000 cash and signing a new one-year $800,000 note discounted at 9% by the bank. Instructions (1) Make the entry to record the partial refunding. Assume Latty Co. makes reversing entries when appropriate. (2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the discount.

Solution 13-147 (1) Notes Payable .............................................................................. 900,000 Interest Expense .......................................................................... 90,000 Discount on Notes Payable (9% × $800,000) ............................. 72,000 Notes Payable .................................................................. 800,000 Cash ................................................................................. 262,000 (2) Interest Expense (1/3 × $72,000) ................................................ 24,000 Discount on Notes Payable ............................................. 24,000

BE. 13-148—Payroll entries. Total payroll of Walnut Co. was $2,760,000, of which $480,000 represented amounts paid in excess of $118,500 to certain employees. The amount paid to employees in excess of $7,000 was $2,160,000. Income taxes withheld were $675,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee's salaries and wages to $118,500 and 1.45% in excess of $118,500. Instructions (a) Prepare the journal entry for the salaries and wages paid. (b) Prepare the entry to record the employer payroll taxes.

Solution 13-148 (a) Salaries and Wages Expense ..................................................... 2,760,000 Withholding Taxes Payable ............................................ 675,000 FICA Taxes Payable ....................................................... 181,380* Cash ................................................................................ 1,903,620 * [($2,760,000 - $480,000) × 7.65%] + ($480,000 × 1.45%) (b) Payroll Tax Expense ................................................................. 193,380 FICA Taxes Payable ($2,280,000 × 7.65%) + ($480,000 × 1.45%) ........... 181,380 FUTA Taxes Payable [($2,760,000 - $2,160,000) × .8%] .......................... 4,800 SUTA Taxes Payable ($600,000 × 1.2%) ...................... 7,200

Ex. 13-149—Compensated absences. Snow Co. began operations on January 2, 2017. It employs 15 people who work 8-hour days. Each employee earns 10 paid vacation days annually. Vacation days may be taken after January 10 of the year following the year in which they are earned. The average hourly wage rate was $24.00 in 2017 and $25.50 in 2018. The average vacation days used by each employee in 2018 was 9. Snow Co. accrues the cost of compensated absences at rates of pay in effect when earned. Instructions Prepare journal entries to record the transactions related to paid vacation days during 2017 and 2018.

Solution 13-149 2017 Salaries and Wages Expense ............................................... 28,800 (1) Salaries and Wages Payable .................................... 28,800 (1) 15 × 8 × $24.00 = $2,880; $2,880 × 10 = $28,800. 2018 Salaries and Wages Expense ............................................... 1,620 Salaries and Wages Payable ................................................ 25,920 (2) Cash .......................................................................... 27,540 (3) Salaries and Wages Expense ............................................... 30,600 (4) Salaries and Wages Payable .................................... 30,600 (2) $2,880 × 9 = $25,920. (3) 15 × 8 × $25.50 = $3,060; $3,060× 9 = $27,540. (4) $3,060 × 10 = $30,600.

An unrealized holding gain or loss is the net change in the fair value of the liability from one period to another, exclusive of interest expense recognized but not recorded.

Bond issues that mature in installments are called serial bonds.

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.

Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

Companies usually make bond interest payments semiannually, although the interest rate is generally expressed as an annual rate.

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

Discount on Notes Payable is a contra account to Notes Payable on the balance sheet.

Many companies do not segregate the sales tax collected and the amount of the sale at the time of the sale.

The debt to assets ratio will go up if an equal amount of assets and liabilities are added to the balance sheet.

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

The interest rate of variable-rate mortgages is tied to changes in the fluctuating market rate.

The replacement of an existing bond issue with a new one is called refunding.

U.S. GAAP and IFRS have the same accounting guidelines for bond issue costs.

Under IFRS the required procedure for amortization of a discount or premium is the effectiveinterest method.

Under IFRS, all troubled-debt restructurings are accounted for as extinguishments.

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

a. Obligations related to product warranties.

If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

a. greater than if the straight-line method were used.

For purposes of recognizing a provision "probable" is defined as more likely than not

Paying a current liability with cash will always reduce the current ratio.

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

What are compensated absences?

d. Paid time off.

Companies report bond discounts as a direct deduction from the face amount of the bond.

If a long-term note payable has a stated interest rate, that rate should be considered to be the effective rate.

An example of an item which is not a liability is

a. dividends payable in stock

If the market rate is greater than the coupon rate, bonds will be sold at a premium.

In a troubled debt restructuring, the loss recognized by the creditor will equal the gain recognized by the debtor.

The term used for bonds that are unsecured as to principal is

b. debenture bonds.

The loss to be recognized by a creditor on an impaired loan is the difference between the investment in the loan and the expected undiscounted future cash flows from the loan.

IFRS uses the term "contingent" for assets and liabilities not recognized in the financial statement.

Magazine subscriptions and airline ticket sales both result in unearned revenues.

The times interest earned is computed by dividing income before interest expense by interest expense.

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

d. Federal income taxes

*Ex. 14-123—Accounting for a troubled debt settlement. Mann, Inc., which owes Doran Co. $1,200,000 in notes payable with accrued interest of $108,000, is in financial difficulty. To settle the debt, Doran agrees to accept from Mann equipment with a fair value of $1,140,000, an original cost of $1,680,000, and accumulated depreciation of $390,000. Instructions (a) Compute the gain or loss to Mann on the settlement of the debt. (b) Compute the gain or loss to Mann on the transfer of the equipment. (c) Prepare the journal entry on Mann 's books to record the settlement of this debt. (d) Prepare the journal entry on Doran's books to record the settlement of the receivable.

*Solution 14-123 (a) Note payable $1,200,000 Interest payable 108,000 Carrying amount of debt 1,308,000 Fair value of equipment 1,140,000 Gain on restructuring of debt $ 168,000 (b) Cost $1,680,000 Accumulated depreciation 390,000 Book value 1,290,000 Fair value of plant assets 1,140,000 Loss on disposal of equipment $ 150,000 (c) Notes Payable ................................................................................ 1,200,000 Interest Payable .............................................................................. 108,000 Accumulated Depreciation .............................................................. 390,000 Loss on Disposal of Equipment ...................................................... 150,000 Equipment ........................................................................... 1,680,000 Gain on Restructuring of Debt ............................................ 168,000 (d) Equipment ...................................................................................... 1,140,000 Allowance for Doubtful Accounts .................................................... 168,000 Notes Receivable ................................................................ 1,200,000 Interest Receivable ............................................................. 108,000

*Ex. 14-124—Accounting for a troubled debt restructuring. On December 31, 2017, Short Co. is in financial difficulty and cannot pay a note due that day. It is a $2,000,000 note with $200,000 accrued interest payable to Bryan, Inc. Bryan agrees to forgive the accrued interest, extend the maturity date to December 31, 2019, and reduce the interest rate to 4%. The present value of the restructured cash flows is $1,712,000. Instructions Prepare entries for the following: (a) The restructure on Short's books. (b) The payment of interest on December 31, 2018. (c) The restructure on Bryan's books.

*Solution 14-124 (a) Interest Payable .............................................................................. 200,000 Notes Payable ($2,000,000 × 4% × 2) ................................ 160,000 Gain on Restructuring of Debt. ........................................... 40,000 (b) Notes Payable ................................................................................ 80,000 Cash ................................................................................... 80,000 (c) Allowance for Doubtful Accounts .................................................... 488,000 Notes Receivable (2,000,000 - 1,712,000) ........................ 288,000 Interest Receivable ............................................................. 200,000

*Pr. 14-131—Accounting for a troubled debt restructuring. Ludwig, Inc., which owes Giffin Co. $4,000,000 in notes payable, is in financial difficulty. To eliminate the debt, Giffin agrees to accept from Ludwig land having a fair value of $3,050,000 and a recorded cost of $2,250,000. Instructions (a) Compute the amount of gain or loss to Ludwig, Inc. on the transfer (disposition) of the land. (b) Compute the amount of gain or loss to Ludwig, Inc. on the restructuring of the debt. (c) Prepare the journal entry on Ludwig 's books to record the restructuring of this debt. (d) Compute the gain or loss to Giffin Co. from restructuring of its receivable from Ludwig. (e) Prepare the journal entry on Giffin's books to record the restructuring of this receivable.

*Solution 14-131 (a) Fair value of the land $3,050,000 Cost of the land to Ludwig, Inc. 2,250,000 Gain on disposal of land $ 800,000 (b) Carrying amount of debt $4,000,000 Fair value of the land given 3,050,000 Gain on restructuring of debt $ 950,000 (c) Notes Payable ............................................................................... 4,000,000 Land .................................................................................. 2,250,000 Gain on Disposal of Land .................................................. 800,000 Gain on Restructuring of Debt ........................................... 950,000 (d) Carrying amount of receivable $4,000,000 Land received in restructuring 3,050,000 Loss on restructured debt $950,000 (e) Land .............................................................................................. 3,050,000 Allowance for Doubtful Accounts .................................................. 950,000 Notes Receivable .............................................................. 4,000,000

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for liabilities.

Among the similarities are: (1) IFRS requires that companies present current and noncurrent liabilities on the face of the statement of financial position, with current liabilities generally presented in order of liquidity, (2) Both prohibit the recognition of liabilities for future losses; (3) IFRS and GAAP are similar in the treatment of asset retirement obligations (AROs), and (4) IFRS and GAAP are similar in their treatment of contingencies. Although the two standards are similar with respect to the above topics, there are differences, including: (1) Under IFRS, the measurement of a provision related to a contingency is based on the best estimate of the expenditure required to settle the obligation. If a range of estimates is predicted and no amount in the range is more likely than any other amount in the range, the 'mid-point' of the range is used to measure the liability. In GAAP, the minimum amount in a range is used; (2) IFRS permits recognition of a restructuring liability, once a company has committed to a restructuring plan. GAAP has additional criteria (i.e., related to communicating the plan to employees), before a restructuring liability can be established; (3) the recognition criteria for an asset retirement obligation are more stringent under GAAP—the ARO is not recognized unless there is a present legal obligation and the fair value of the obligation can be reasonably estimated; and (4) the criteria for recognizing contingent assets for insurance recoveries are recognized if probable; IFRS requires the recovery be "virtually certain," before recognition of an asset is permitted.

Pr. 14-127—Bond interest and discount amortization. Grove Corporation issued $6,000,000 of 8% bonds on October 1, 2017, due on October 1, 2022. The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield 10% effective annual interest. Grove Corporation closes its books annually on December 31. Instructions (a) Complete the following amortization schedule for the dates indicated. (Round all answers to the nearest dollar.) Use the effective-interest method. Debit Credit Carrying Amount Credit Cash Interest Expense Bond Discount of Bonds October 1, 2017 $5,536,676 April 1, 2018 October 1, 2018 (b) Prepare the adjusting entry for December 31, 2018. Use the effective-interest method. (c) Compute the interest expense to be reported in the income statement for the year ended December 31, 2018.

Credit Cash Interest Expense Bond Discount of Bonds October 1, 2017 $5,536,676 April 1, 2018 $240,000 $276,834 $36,834 5,573,510 October 1, 2018 240,000 278,676 38,676 5,612,186 Solution 14-127 (Cont.) (b) Interest Expense ($5,612,186 × 10% × 3/12) .................................. 140,305 Interest Payable (1/2 × $240,000) ....................................... 120,000 Discount on Bonds Payable ($140,305 - $120,000) ........... 20,305 (c) $ 138,417(1/2 of $276,834) 278,676 140,305 $557,398

Pr. 13-154—Refinancing of short-term debt. At the financial statement date of December 31, 2017, the liabilities outstanding of Pollard Corporation included the following: 1. Cash dividends on common stock, $50,000, payable on January 15, 2018. 2. Note payable to Wabaso State Bank, $470,000, due January 20, 2018. 3. Serial bonds, $1,800,000, of which $450,000 mature during 2018. 4. Note payable to Orlando National Bank, $300,000, due January 27, 2018. The following transactions occurred early in 2018: January 15: The cash dividends on common stock were paid. January 20: The note payable to Wabaso State Bank was paid. January 25: The corporation entered into a financing agreement with Wabaso State Bank, enabling it to borrow up to $500,000 at any time through the end of 2020. Amounts borrowed under the agreement would bear interest at 1% above the bank's prime rate and would mature 3 years from the date of the loan. The corporation immediately borrowed $400,000 to replace the cash used in paying its January 20 note to the bank. January 26: 40,000 shares of common stock were issued for $350,000. $300,000 of the proceeds was used to liquidate the note payable to Orlando National Bank. February 1: The financial statements for 2017 were issued. Instructions Prepare a partial balance sheet for Pollard Corporation, showing the manner in which the above liabilities should be presented at December 31, 2017. The liabilities should be properly classified between current and long-term, and appropriate note disclosure should be included.

Current liabilities: Dividends payable $ 50,000 Notes payable— Wabaso State Bank 470,000 Currently maturing portion of serial bonds 450,000 Total current liabilities $ 970,000 Long-term debt: Note payable—Orlando National Bank, refinanced in January, 2018—Note 1 300,000 Serial bonds not maturing currently 1,350,000 Total long-term debt 1,650,000 Total liabilities $2,620,000 Note 1: On January 26, 2018, the corporation issued 40,000 shares of common stock and received proceeds totaling $350,000, of which $300,000 was used to liquidate a note payable that matured on January 27, 2018. Accordingly, such note payable has been classified as long-term debt at December 31, 2017.

A bond may only be issued on an interest payment date.

A company can exclude a short-term obligation from current liabilities if it intends to refinance the obligation and has an unconditional right to defer settlement of the obligation for at least 12 months following the due date.

A company must accrue a liability for sick pay that accumulates but does not vest.

A mortgage bond is referred to as a debenture bond.

A zero-interest-bearing note payable that is issued at a discount will not result in any interest expense being recognized.

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

All long-term debt maturing within the next year must be classified as a current liability on the balance sheet.

Amortization of a premium increases bond interest expense, while amortization of a discount decreases bond interest expense.

Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is reasonably possible that a liability has been incurred.

Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

IFRS allows for reduced disclosure of contingent liabilities if the disclosure could increase the company`s chance of losing a lawsuit.

IFRS requires the use of straight-line method for amortization of a discount or premium.

If a company plans to retire long-term debt from a bond retirement fund, it should report the debt as current.

The revenue from a service-type warranty that covers several years should all be recognized in the period the warranty is sold.

Under IFRS, bond issue costs are recorded as an asset.

Under an assurance-type warranty, companies charge warranty costs only to the period in which they comply with the warranty.

Ex. 13-150—Contingent liabilities. Below are three independent situations. 1. In August, 2018 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Barkley Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000. 2. A suit for breach of contract seeking damages of $3,000,000 was filed by an author against Henderson Co. on October 4, 2018. Henderson's legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $1,000,000 and $2,250,000. No amount within this range is a better estimate of potential damages than any other amount. 3. Kroft is involved in a pending court case. Kroft's lawyers believe it is probable that Kroft will be awarded damages of $1,000,000. Instructions Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers.

Solution 13-150 1. Barkley Co. should disclose in the notes to the financial statements the existence of a possible contingent liability related to the law suit. The note should indicate the range of the possible loss. The contingent liability should not be accrued because the loss is not probable. 2. The probable award should be accrued by a charge to an estimated loss and a credit to an estimated liability of $1,000,000. Henderson Co. should disclose the following in the notes to the financial statements: the amount of the suit, the nature of the contingency, the reason for the accrual, and the range of the possible loss. The accrual is made because it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. The lowest amount of the range of possible losses is used when no amount is a better estimate than any other amount. 3. Kroft should not record the gain contingency until it's realized. Usually, gain contingencies are neither accrued nor disclosed. The $1,000,000 gain contingency should be disclosed only if the probability that it will be realized is very high.

Ex. 13-151—Premiums. Irwin Music Shop gives its customers coupons redeemable for a poster plus a Bo Diddley CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $6.00 cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented for redemption. Sales for the first period were $700,000, and the coupons redeemed totaled 420,000. Sales for the second period were $840,000, and the coupons redeemed totaled 750,000. Irwin Music Shop bought 20,000 posters at $2.50/poster and 20,000 CDs at $7.50/CD. Instructions Prepare the following entries for the two periods, assuming all the coupons expected to be redeemed from the first period were redeemed by the end of the second period. Entry Period 1 Period 2 (a) To record coupons redeemed ——————————————————————————————————————————— (b) To record estimated liability

Solution 13-151 Entry Period 1 Period 2 (a) Premium Liability 5,600 Premium Expense [(420,000 ÷ 100) × ($10 - $6)] 16,800 24,400 Cash (420,000 ÷ 100) × $6 25,200 45,000 Inventory of Premiums 42,000 75,000 ——————————————————————————————————————————— (b) Premium Expense 5,600* 2,480 Premium Liability 5,600 2,480 *[(700,000 × .80) - 420,000] ÷ 100 × $4

Ex. 13-152—Premiums. Sterling Co. includes one coupon in each bag of dog food it sells. In return for 4 coupons, customers receive a dog toy that the company purchases for $1.50 each. Sterling's experience indicates that 60 percent of the coupons will be redeemed. During 2017, 150,000 bags of dog food were sold, 18,000 toys were purchased, and 60,000 coupons were redeemed. During 2018, 180,000 bags of dog food were sold, 24,000 toys were purchased, and 90,000 coupons were redeemed. Instructions Determine the premium expense to be reported in the income statement and the premium liability on the balance sheet for 2017 and 2018.

Solution 13-152 2017 2018 Premium expense $33,750 (1) $40,500 (3) Premium liability 11,250 (2) 18,000 (4) (1) 150,000 × .6 = 90,000; 90,000 ÷ 4 = 22,500; 22,500 × $1.50 = $33,750. (2) 60,000 ÷ 4 = 15,000; 22,500 - 15,000 = 7,500; 7,500 × $1.50 = $11,250. (3) 180,000 × .6 = 108,000; 108,000 ÷ 4 = 27,000; 27,000 × $1.50 = $40,500. (4) 90,000 ÷ 4 = 22,500; 7,500 + 27,000 - 22,500 = 12,000; 12,000 × $1.50 = $18,000.

Pr. 13-153—Accounts and Notes Payable. Described below are certain transactions of Lamar Company for 2018: 1. On May 10, the company purchased goods from Fox Company for $75,000, terms 2/10, n/30. Purchases and accounts payable are recorded at net amounts. The invoice was paid on May 18. 2. On June 1, the company purchased equipment for $150,000 from Rao Company, paying $50,000 in cash and giving a one-year, 9% note for the balance. 3. On September 30, the company discounted at 10% its $300,000, one-year zero-interestbearing note at Virginia State Bank. Instructions (a) Prepare the journal entries necessary to record the transactions above using appropriate dates. (b) Prepare the adjusting entries necessary at December 31, 2018 in order to properly report interest expense related to the above transactions. Assume straight-line amortization of discounts. (c) Indicate the manner in which the above transactions should be reflected in the Current Liabilities section of Lamar Company's December 31, 2018 balance sheet.

Solution 13-153 (a) May 10, 2018 Purchases/Inventory .................................................................... 73,500 Accounts Payable ............................................................ 73,500 May 18, 2018 Accounts Payable ........................................................................ 73,500 Cash ................................................................................. 73,500 June 1, 2018 Equipment .................................................................................... 150,000 Cash ................................................................................. 50,000 Notes Payable .................................................................. 100,000 September 30, 2018 Cash ............................................................................................ 270,000 Discount on Notes Payable ......................................................... 30,000 Notes Payable ................................................................. 300,000 (b) Interest Expense ......................................................................... 5,250 Interest Payable ($100,000 × .09 × 7/12) ....................... 5,250 Interest Expense ......................................................................... 7,500 Discount on Notes Payable ($30,000 × 3/12) ................. 7,500 (c) Current Liabilities Interest payable $ 5,250 Note payable—Rao Company 100,000 Note payable—Virginia State Bank $300,000 Less: Discount on note 22,500 277,500 $382,750

Pr. 13-155—Premiums. Kane Candy Company offers a coffee mug as a premium for every ten $1 candy bar wrappers presented by customers together with $2. The purchase price of each mug to the company is $2.40; in addition it costs $1.60 to mail each mug. The results of the premium plan for the years 2017 and 2018 are as follows (assume all purchases and sales are for cash): 2017 2018 Coffee mugs purchased 720,000 800,000 Candy bars sold 5,600,000 6,750,000 Wrappers redeemed 2,800,000 4,200,000 2017 wrappers expected to be redeemed in 2018 2,000,000 2018 wrappers expected to be redeemed in 2019 2,700,000 Instructions (a) Prepare the general journal entries that should be made in 2017 and 2018 related to the above plan by Kane Candy. (b) Indicate the account names, amounts, and classifications of the items related to the premium plan that would appear on the Kane Candy Company balance sheet and income statement at the end of 2017 and 2018.

Solution 13-155 (a) 2017 Inventory of Premiums ....................................................................... 1,728,000 Cash ....................................................................................... 1,728,000 (720,000 × $2.40 = $1,728,000) Cash ................................................................................................... 5,600,000 Sales Revenue ....................................................................... 5,600,000 (5,600,000 × $1 = $5,600,000) Cash .................................................................................................. 112,000 Premium Expense ............................................................................. 560,000 Inventory of Premiums .......................................................... 672,000 [2,800,000 ÷ 10 = 280,000 × ($2.00 - $1.60) = $112,000 280,000 × $2.40 = $672,000] Premium Expense ............................................................................. 400,000 Premium Liability .................................................................. 400,000 (2,000,000 ÷ 10 = 200,000 × $2 = $400,000) 2018 Inventory of Premiums ...................................................................... 1,920,000 Cash ..................................................................................... 1,920,000 (800,000 × $2.40 = $1,920,000) Cash .................................................................................................. 6,750,000 Sales Revenue ...................................................................... 6,750,000 (6,750,000 × $1 = $6,750,000) Cash .................................................................................................. 168,000 Premium Liability ............................................................................... 400,000 Premium Expense ............................................................................. 440,000 Inventory of Premium ............................................................ 1,008,000 [4,200,000 ÷ 10 = 420,000 × ($2.00 - $1.60) = $168,000 420,000 × $2.40 = $1,008,000] Premium Expense ............................................................................. 540,000 Premium Liability ................................................................... 540,000 (2,700,000 ÷ 10 = 270,000 × $2 = $540,000) (b) Balance Sheet Name Class 2017 2018 Inventory of Premiums Current Asset $1,056,000 $1,968,000 Premium Liability Current Liability 400,000 540,000 Income Statement Name Class 2017 2018 Premium Expense Operating Expense $960,000 $980,000

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

An onerous contract is one in which the unavoidable costs of satisfying the obligations outweigh the economic benefits to be received.

Pr. 13-156—Warranties. Merritt Equipment Company sells computers for $1,500 each and also gives each customer a 2- year warranty that requires the company to perform periodic services and to replace defective parts. During 2017, the company sold 1,200 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $40 for parts and $60 for labor per unit. (Assume sales all occur at December 31, 2017.) In 2018, Merritt incurred actual warranty costs relative to 2017 computer sales of $16,000 for parts and $24,000 for labor. Instructions (a) Record give the entries to reflect the above transactions (accrual method) for 2017 and 2018. (b) The transactions of part (a) create what balance under current liabilities in the 2017 balance sheet?

Solution 13-156 (a) 2017 Accounts Receivable ......................................................................... 1,800,000 Sales Revenue ....................................................................... 1,800,000 Warranty Expense ............................................................................. 120,000 Warranty Liability .................................................................. 120,000 2018 Warranty Liability ............................................................................... 40,000 Inventory ................................................................................ 16,000 Cash, Inventory, Accrued Payroll .......................................... 24,000 (b) 2017 Current Liabilities—Warranty Liability $60,000. (The remainder of the $120,000 liability is a long-term liability.)

BE. 14-117—Terms related to long-term debt. Place the letter of the best matching phrase before each word. ____ 1. Indenture ___ 6. Times Interest Earned ____ 2. Refunding ___ 7. Mortgage ____ 3. Bonds Issued at Par ___ 8. Premium on Bonds ____ 4. Carrying Value ___ 9. Reacquisition Price ____ 5. Nominal Rate ___ 10. Market Rate a. Requires that bond discount be reported in the balance sheet as a direct deduction from the face of the bond. b. Rate set by party issuing the bonds which appears on the bond instrument. c. The interest paid each period is the effective interest at date of issuance. d. Rate of interest actually earned by the bondholders. e. Results when bonds are sold below par. f. Results when bonds are sold above par. g. The replacement of an existing bond issuance with a new one. h. Price paid by issuing corporation for its own bonds. i. Book value of bonds at any given date. j. Ratio of current assets to current liabilities. k. The bond contract or agreement. l. Indicates the company's ability to meet interest payments as they come due. m. Ratio of debt to equity. n. Exclusive right to manufacture a product. o. A document that pledges title to property as security for a loan.

Solution 14-117 1. k 3. c 5. b 7. o 9. h 2. g 4. i 6 l 8 f 10. d

BE. 14-118—Bond issue price and premium amortization. On January 1, 2018, Piper Co. issued ten-year bonds with a face value of $5,000,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are: Present value of 1 for 10 periods at 10% .................................. .386 Present value of 1 for 10 periods at 12% .................................. .322 Present value of 1 for 20 periods at 5% .................................... .377 Present value of 1 for 20 periods at 6% .................................... .312 Present value of annuity for 10 periods at 10% ........................ 6.145 Present value of annuity for 10 periods at 12% ........................ 5.650 Present value of annuity for 20 periods at 5% .......................... 12.462 Present value of annuity for 20 periods at 6% .......................... 11.470 Instructions (a) Calculate the issue price of the bonds. (b) Without prejudice to your solution in part (a), assume that the issue price was $4,420,000. Prepare the amortization table for 2018, assuming that amortization is recorded on interest payment dates using the effective-interest method.

Solution 14-118 (a) .312 × $5,000,000 = $ 1,560,000 11.470 × $250,000 = 2,867,500 $4,427,500 (b) Date: 1/1/18, 6/30/18, 12/31/18 Cash: ---, $250,000, $250,000 Expense: ---, $265,200, $266,112 Amortization: ---, $15,200, $16,112 Carrying Amount: $4,420,000, $4,435,200, $4,451,312

BE. 14-119—Amortization of discount or premium. Grider Industries, Inc. issued $15,000,000 of 8% debentures on May 1, 2017 and received cash totaling $13,308,942. The bonds pay interest semiannually on May 1 and November 1. The maturity date on these bonds is November 1, 2025. The firm uses the effective-interest method of amortizing discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%. Instructions Calculate the total dollar amount of discount or premium amortization during the first year (5/1/17 through 4/30/18) these bonds were outstanding. (Show computations and round to the nearest dollar.)

Solution 14-119 Date: 5/1/17, 11/1/17, 5/1/18 Interest Expense: ---, $665,447, $668,719 Cash Interest: ---, $600,000, $600,000 Discount Amortized: ---, $65,447, $68,719 Total: 65,447+ 68,719= $134,166 Carrying Value of Bonds: $13,308,942, $13,374,389, 13,443,108

Ex. 14-120—Entries for Bonds Payable. Prepare journal entries to record the following transactions related to long-term bonds of Quirk Co. (a) On April 1, 2016, Quirk issued $2,000,000, 9% bonds for $2,151,472 including accrued interest. Interest is payable annually on January 1, and the bonds mature on January 1, 2026. (b) On July 1, 2018 Quirk retired $600,000 of the bonds at 102 plus accrued interest. Quirk uses straight-line amortization.

Solution 14-120 (a) Cash ............................................................................................... 2,151,472 Bonds Payable ..................................................................... 2,000,000 Interest Expense ($2,000,000 × 9% × 3/12) ......................... 45,000 Premium on Bonds Payable ................................................. 106,472 (b) Interest Expense ............................................................................. 25,362 Premium on Bonds Payable ($106,472 × .3 × 6/117) .................... 1,638 Cash ($600,000 × 9% × 6/12) .............................................. 27,000 Bonds Payable ............................................................................... 600,000 Premium on Bonds Payable ($106,472 × .3 × 90/117) .................. 24,570 Cash ..................................................................................... 612,000 Gain on Redemption of Bonds ............................................. 12,570

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

Ex. 14-121—Retirement of bonds. Prepare journal entries to record the following retirement. (Show computations and round to the nearest dollar.) The December 31, 2018 balance sheet of Wolfe Co. included the following items: 7.5% bonds payable due December 31, 2026 $3,000,000 Unamortized discount on bonds payable 120,000 The bonds were issued on December 31, 2016 at 95, with interest payable on June 30 and December 31. (Use straight-line amortization.) On April 1, 2016, Wolfe retired $600,000 of these bonds at 101 plus accrued interest.

Solution 14-121 Interest Expense .............................................................................. 12,000 Cash ($600,000 × 7.5% × 3/12) ........................................... 11,250 Discount on Bonds Payable ($120,000 × 1/5 × 1/8 × 3/12) . 750 Bonds Payable ................................................................................. 600,000 Loss on Redemption of Bonds ......................................................... 29,250 Discount on Bonds Payable [(1/5 × $120,000) - $750] ........ 23,250 Cash ..................................................................................... 606,000

Ex. 14-122—Early extinguishment of debt. Hurst, Incorporated sold its 8% bonds with a maturity value of $9,000,000 on August 1, 2016 for $8,838,000. At the time of the sale the bonds had 5 years until they reached maturity. Interest on the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at any time after August 1, 2018. By October 1, 2018, the market rate of interest has declined and the market price of Hurst's bonds has risen to a price of 101. The firm decides to refund the bonds by selling a new 6% bond issue to mature in 5 years. Hurst begins to reacquire its 8% bonds in the market and is able to purchase $1,500,000 worth at 101. The remainder of the outstanding bonds is reacquired by exercising the bonds' call feature. In the final analysis, how much was the gain or loss experienced by Hurst in reacquiring its 8% bonds? (Assume the firm used straight-line amortization.) Show calculations.

Solution 14-122 Reacquisition price: $1,500,000 × 1.01 = $ 1,515,000 $7,500,000 × 1.04 = 7,800,000 $9,315,000 Less net carrying amount: $8,838,000 + ($162,000 × 26/60) = 8,908,200 Loss on early extinguishment $ 406,800

Pr. 14-126—Bond discount amortization. On June 1, 2016, Everly Bottle Company sold $3,000,000 in long-term bonds for $2,631,300. The bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under the effective-interest method. Instructions (a) Construct a bond amortization table for this problem to indicate the amount of interest expense and discount amortization at each May 31. Include only the first four years. Make sure all columns and rows are properly labeled. (Round to the nearest dollar.) (b) The sales price of $2,631,300 was determined from present value tables. Specifically explain how one would determine the price using present value tables. (c) Assuming that interest and discount amortization are recorded each May 31, prepare the adjusting entry to be made on December 31, 2018. (Round to the nearest dollar.)

Solution 14-126 (a) Date: 6/1/16, 5/31/17, 5/31/18, 5/31/19, 5/37/20 Credit Cash: ---, $240,000, $240,000, $240,000, $240,000 Debit Interest Expense: ---, $263,130, $265,443, 267,987, 270,786 Credit Bond Discount: ---, $23,130, 25,443, 27,987, 30,786 Carrying Amount of Bonds: $2,631,300, 2,654,430, 2,679,873, 2,707,786, 2,738,646 (b) (1) Find the present value of $3,000,000 due in 10 years at 10%. (2) Find the present value of 10 annual payments of $240,000 at 10%. Add (1) and (2) to obtain the present value of the principal and the interest payments. (c) Interest Expense ........................................................................... 156,326* Interest Payable ................................................................ 140,000** Discount on Bonds Payable .............................................. 16,326 *7/12 × $267,987 (from Table) = $156,326 **7/12 × 8% × $3,000,000 = $140,000

Pr. 14-128—Entries for bonds payable. Prepare the necessary journal entries to record the following transactions relating to the long-term issuance of bonds of Pitts Co.: March 1 Issued $4,000,000 face value Pitts Co. second mortgage, 8% bonds for $4,360,800, including accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds maturing 10 years from this past December 1. The bonds are callable at 102. June 1 Paid semiannual interest on Pitts Co. bonds. (Use straight-line amortization of any premium or discount.) December 1 Paid semiannual interest on Pitts Co. bonds and purchased $2,000,000 face value bonds at the call price in accordance with the provisions of the bond indenture.

Solution 14-128 March 1: Cash ..................................................................................... 4,360,800 Bonds Payable ......................................................... 4,000,000 Premium on Bonds Payable ..................................... 280,800 Interest Expense ($4,000,000 × 8% × 3/12) ............. 80,000 June 1: Interest Expense .................................................................. 152,800 Premium on Bonds Payable ($280,800 × 3/117) ................. 7,200 Cash ......................................................................... 160,000 Dec. 1: Interest Expense .................................................................. 145,600 Premium on Bonds Payable ($280,800 × 6/117) ................. 14,400 Cash ......................................................................... 160,000 Bonds Payable ..................................................................... 2,000,000 Premium on Bonds Payable* ............................................... 129,600 Gain on Redemption of Bonds ................................. 89,600 Cash ......................................................................... 2,040,000 *1/2 × ($280,800 - $7,200 - $14,400) = $129,600.Pr. 14-129—Entries for bonds payable. Prepare journal entries to record the following transactions relating to long-term bonds of Kirby, Inc. (Show computations.) (a) On June 1, 2017, Kirby, Inc. issued $8,000,000, 6% bonds for $7,841,000, which includes accrued interest. Interest is payable semiannually on February 1 and August 1 with the bonds maturing on February 1, 2027. The bonds are callable at 102. (b) On August 1, 2017, Kirby paid interest on the bonds and recorded amortization. Kirby uses straight-line amortization. (c) On February 1, 2019, Kirby paid interest and recorded amortization on all of the bonds, and purchased $5,000,000 of the bonds at the call price. Assume that a reversing entry was made on January 1, 2019. Solution 14-129 (a) Cash ............................................................................................... 7,841,000 Discount on Bonds Payable ........................................................... 319,000 Bonds Payable .................................................................... 8,000,000 Interest Expense ($8,000,000 × 6% × 4/12) ....................... 160,000 (b) Interest Expense ($8,000,000 × 6% × 6/12) + $5,500 .................... 245,500 Cash ................................................................................... 240,000 Discount on Bonds Payable ($319,000 × 2/116) ................ 5,500 (c) Interest Expense ($240,000 + $16,500) ......................................... 256,500 Cash ................................................................................... 240,000 Discount on Bonds Payable ($319,000 × 6/116) ............... 16,500 Bonds Payable ............................................................................... 5,000,000 Loss on Redemption of Bonds ....................................................... 265,000 Discount on Bonds Payable [.625 × ($319,000 - $55,000)] 165,000 Cash ................................................................................... 5,100,000

Pr. 14-130—Fair value option Harper Company commonly issues long-term notes payable to its various lenders. Harper has had a pretty good credit rating such that its effective borrowing rate is quite low (less than 8% on an annual basis). Harper has elected to use the fair value option for the long-term notes issued to Barclay's Bank and has the following data related to the carrying and fair value for these notes. Carrying Value Fair Value December 31, 2017 $135,000 $135,000 December 31, 2018 112,000 107,000 December 31, 2019 90,000 97,000 Instructions (a) Prepare the journal entry at December 31 (Harper's year-end) for 2017, 2018, and 2019 to record the fair value option for these notes. (b) At what amount will the note be reported on Harper's 2018 balance sheet? (c) What is the effect of recording the fair value option on these notes on Harper's 2019 income?

Solution 14-130 (a) December 31, 2017 No entry since the carrying value is equal to the notes' fair value. December 31, 2018 Notes Payable 5,000 Unrealized Holding Gain or Loss−Income 5,000 December 31, 2019 Unrealized Holding Gain or Loss−Income 12,000 Notes Payable [($97,000 - $90,000) + $5,000] 12,000 (b) The note will be reported at $107,000 on Harper's 2018 balance sheet. (c) Harper's 2019 income is $12,000 lower since the change in fair value is reported as part of net income.

A provision differs from other liabilities in that there is greater uncertainty about the timing and amount of settlement.

On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. *105. Nolte should record interest expense for 2018 of

a. $0. 0. The effective-interest rate is 0%.

Elmer Corporation has $2,500,000 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 $30 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. $1,500,000 50,000 × $30 = $1,500,000.

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet?

a. $14,709,481 $14,703,108 + [($14,703,108 × .04) - $585,000] + [$14,706,232 × .04) - $585,000] = $14,709,481.

Vanco Company has 70 employees who work 8-hour days and are paid hourly. On January 1, 2017, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2017 may first be taken on January 1, 2018. Information relative to these employees is as follows: Hourly Vacation Days Earned Vacation Days Used Year Wages by Each Employee by Each Employee 2017 $20.50 10 0 2018 22.50 10 8 2019 25.50 10 10 Vanco has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. What is the amount of the accrued liability for compensated absences that should be reported at December 31, 2019?

a. $168,000. ($25.50 × 8 × 10 × 70) + ($22.50 × 8 × 2 × 70) = $168,000.

On January 1, 2017, Ann Price loaned $187,825 to Joe Kiger. A zero-interest-bearing note (face amount, $250,000) was exchanged solely for cash; no other rights or privileges were exchanged. The note is to be repaid on December 31, 2019. The prevailing rate of interest for a loan of this type is 10%. The present value of $250,000 at 10% for three years is $187,825. What amount of interest income should Ms. Price recognize in 2017?

a. $18,783. $187,825 × .10 = $18,783.

Jump Corporation has $3,000,000 of short-term debt it expects to retire with proceeds from the sale of 85,000 shares of common stock. If the stock is sold for $25 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. $2,125,000 85,000 × $25 = $2,125,000.

In 2017, Pollard Corporation began selling a new line of products that carry 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 3% Second year of warranty 5% Sales and actual warranty expenditures for 2017 and 2018 are presented below: 2017 2018 Sales $750,000 $1,050,000 Actual warranty expenditures 45,000 75,000 What is the estimated warranty liability at the end of 2018?(assume the accrual method)

a. $24,000. [($750,000 + $1,050,000) × .08] - $120,000 = $24,000.

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using effective-interest amortization, what will the carrying value of the bonds be on the December 31, 2017 balance sheet?

a. $24,515,802 $24,505,180 + [($24,505,180 × .04) - $975,000] + [($24,510,387 × .04) - $975,000] = $24,515,802.

On January 1, 2018, Doty Co. redeemed its 15-year bonds of $7,000,000 par value for 102. They were originally issued on January 1, 2006 at 92 with a maturity date of January 1, 2021. Doty amortizes discounts and premiums using the straight-line method. What amount of loss should Doty recognize on the redemption of these bonds (ignore taxes)?

a. $252,000 ($7,000,000*1.02)- ($6,440,000+(($560,000/15) x 12) = $252,000.

On January 1, 2017, Ellison Co. issued eight-year bonds with a face value of $6,000,000 and a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were sold to yield 8%. Table values are: Present value of 1 for 8 periods at 6% .......................................... .627 Present value of 1 for 8 periods at 8% .......................................... .540 Present value of 1 for 16 periods at 3% ........................................ .623 Present value of 1 for 16 periods at 4% ........................................ .534 Present value of annuity for 8 periods at 6% ................................ 6.210 Present value of annuity for 8 periods at 8% ................................ 5.747 Present value of annuity for 16 periods at 3% .............................. 12.561 Present value of annuity for 16 periods at 4% .............................. 11.652 60. The present value of the principal is

a. $3,204,000. $6,000,000 × .534 = $3,204,000.

Ebbert Company's salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2018 is as follows: 12/31/17 12/31/18 Employee advances $24,000 $ 36,000 Accrued salaries payable 160,000 ? Salaries expense during the year 1,400,000 Salaries paid during the year (gross) 1,250,000 At December 31, 2018, what amount should Ebbert report for accrued salaries payable?

a. $310,000. $1,400,000 + $160,000 - $1,250,000 = $310,000.

On July 1, 2016, Noble, Inc. issued 9% bonds in the face amount of $10,000,000, which mature on July 1, 2022. The bonds were issued for $9,560,000 to yield 10%, resulting in a bond discount of $440,000. Noble uses the effective-interest method of amortizing bond discount. Interest is payable annually on June 30. At June 30, 2018, Noble's unamortized bond discount should be

a. $322,400. 2016-2017: $9,560,000 + [($9,560,000 × .1) - ($10,000,000 × .09)] = $9,616,000. 2017-2018: $9,616,000 + ($961,600 - $900,000) = $9,677,600 $10,000,000 - $9,677,600 = $322,400.

On September 1, Horton purchased $39,900 of inventory items on credit with the terms 1/15, net 30, FOB destination. Freight charges were $840. Payment for the purchase was made on September 18. Assuming Horton uses the perpetual inventory system and the net method of accounting for purchase discounts, what amount is recorded as inventory from this purchase?

a. $39,501. ($39,900 × .99) = $39,501.

On July 1, 2018, Spear Co. issued 4,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2018 and mature on April 1, 2028. Interest is payable semiannually on April 1 and October 1. What amount did Spear receive from the bond issuance?

a. $4,060,000 ($4,000,000 × .99) + ($4,000,000 × .10 × 3/12) = $4,060,000.

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

a. Management indicated that they are going to refinance the obligation.

a. $5,301,360. $3,204,000 + $2,097,360 = $5,301,360.

On October 1, 2017 Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. 78. Bond interest expense reported on the December 31, 2017 income statement of Macklin Corporation would be

a. $69,000 [($6,000,000 × .05) × 3/12] - [($240,000 ÷ 10) × 3/12] = $69,000.

Sawyer Company self-insures its property for fire and storm damage. If the company were to obtain insurance on the property, it would cost them $2,000,000 per year. The company estimates that on average it will incur losses of $1,600,000 per year. During 2018, $700,000 worth of losses were sustained. How much total expense and/or loss should be recognized by Sawyer Company for 2018?

a. $700,000 in losses and no insurance expense $700,000 losses and no insurance expense

Which of the following is true about accounts payable? 1. Accounts payable are also called trade accounts payable. 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.

a. 1

In the recent year Hill Corporation had net income of $210,000, interest expense of $50,000, and tax expense of $90,000. What was Hill Corporation's times interest earned for the year?

a. 7.0 ($210,000 + $50,000 + $90,000) ÷ $50,000 = 7.0.

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. d. None of these answers are correct. Answer: D

Which of the following is a current liability?

a. A long-term debt maturing currently, which is to be paid with cash in a sinking fund b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue c. A long-term debt maturing currently, which is to be converted into common stock d. None of these answers are correct. Answer: D

What condition(s) is/are necessary to recognize an asset retirement obligation?

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

Qualpoint 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 $960, what is the required journal entry?

a. Debit Salaries and Wages Expense for $124,800 and credit Salaries and Wages Payable for $124,800. 65 × 2 weeks × $960/week = $124,800.

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

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

Which of the following is generally associated with payables classified as accounts payable? Periodic Payment Secured of Interest by Collateral

a. Periodic Payment of Interest-No Secured by Collateral- No Conceptual—accounts payable generally are zero-interest-bearing and unsecured.

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

a. Present values are used to measure certain liabilities.

Which of the following contingencies need not be disclosed in the financial statements or the related notes?

a. Probable losses not reasonably estimable b. Environmental liabilities that cannot be reasonably estimated c. Guarantees of indebtedness of others d. All of these must be disclosed. Answer: D

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

a. Sales taxes are an expense of the seller.

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 d. All of these answers are correct. Answer: D

Which of the following is a characteristic of an assurance-type warranty, but not a servicetype warranty?

a. Warranty liability.

Which of the following may be a current liability?

a. Withheld Income Taxes b. Deposits Received from Customers c. Deferred Revenue d. All of these answers are correct. Answer: D

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.

The ability to consummate the refinancing of a short-term obligation may be demonstrated 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 answers are correct. Answer: D

A project financing arrangement refers to:

a. an arrangement where a company creates a special-purpose entity to perform a special project.

An early extinguishment of bonds payable, which were originally issued at a premium, is made by purchase of the bonds between interest dates. At the time of reacquisition

a. any costs of issuing the bonds must be amortized up to the purchase date. b. the premium must be amortized up to the purchase date. c. interest must be accrued from the last interest date to the purchase date. d. All of these answers are correct. Answer: D

Bonds for which the owners' names are not registered with the issuing corporation are called

a. bearer bonds.

Under IFRS, short-term obligations expected to be refinanced can be classified as noncurrent if the refinancing is completed:

a. by the financial reporting date.

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

a. current liabilities.

An account which would be classified as a current liability is

a. dividends payable in the form of a company's stock. b. accounts payable—debit balances. c. losses expected to be incurred within the next twelve months in excess of the company's insurance coverage. d. none of these answers are correct. Answer: D

If bonds are initially sold at a discount and the straight-line method of amortization is used, interest expense in the earlier years will

a. exceed what it would have been had the effective-interest method of amortization been used.

IFRS generally assumes that all restructurings be accounted for as:

a. extinguishments of debt.

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 30. Another step in calculating the issue price of the bonds is to

a. multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table. b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table. c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table. d. None of these answers is correct. Answer: D

When a note payable is exchanged for property, goods, or services, the stated interest rate is presumed to be fair unless

a. no interest rate is stated. b. the stated interest rate is unreasonable. c. the stated face amount of the note is materially different from the current cash sales price for similar items or from current fair value of the note. d. any of these answers are correct. Answer: D

Jeff Brown is a farmer who owns land which borders on the right-of-way of the Northern Railroad. On August 10, 2017, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned. Brown 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 Brown in exchange for a release of his right to reimbursement for the loss he has sustained from the fire. Brown appears inclined to accept the Railroad's offer. The Railroad's 2017 financial statements should include the following related to the incident:

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

A debt instrument with no ready market is exchanged for property whose fair value is currently indeterminable. When such a transaction takes place

a. the present value of the debt instrument must be approximated using an imputed interest rate.

Examples of contingent assets include all of the following except:

a. unrealized gain on the sale of investments.

A company offers a cash rebate of $2 on each $6 package of batteries sold during 2018. Historically, 10% of customers mail in the rebate form. During 2018, 5,000,000 packages of batteries are sold, and 175,000 $2 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2018 financial statements dated December 31?

b. $1,000,000; $650,000 5,000,000 × .10 × $2 = $1,000,000; $1,000,000 - $350,000 = $650,000.

On January 1, 2018, Solis Co. issued its 10% bonds in the face amount of $8,000,000, which mature on January 1, 2028. The bonds were issued for $9,080,000 to yield 8%, resulting in bond premium of $1,080,000. Solis uses the effective-interest method of amortizing bond premium. Interest is payable annually on December 31. At December 31, 2018, Solis's adjusted unamortized bond premium should be

b. $1,006,400. $1,080,000 - [($8,000,000 × .10) - ($9,080,000 × .08)] = $1,006,400.

On January 1, 2018, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a $5,000,000 zerointerest-bearing note payable in 5 equal annual installments of $800,000, with the first payment due December 31, 2018. The prevailing rate of interest for a note of this type is 9%. The present value of the note at 9% was $3,605,000 at January 1, 2018. What should be the balance of the Discount on Notes Payable account on the books of Leary at December 31, 2018 after adjusting entries are made, assuming that the effective-interest method is used?

b. $1,070,550 $5,000,000 - $3,605,000 - ($3,605,000 × .09) = $1,070,550.

Palmer Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 3 boxtops from Palmer Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2018, the company sold 1,350,000 boxes of Frosted Flakes and customers redeemed 660,000 boxtops receiving 220,000 bowls. If the bowls cost Palmer Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2018?

b. $100,000 {[(1,350,000 × .60) - 660,000] ÷ 3} × $2 = $100,000.

Cortez Company issues $6,000,000 face value of bonds at 96 on January 1, 2016. The bonds are dated January 1, 2016, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2019, $3,600,000 of the bonds are called at 102 plus accrued interest. What gain or loss would be recognized on the called bonds on September 1, 2019?

b. $163,200 loss {$5,760,000 + [$240,000 × (3 2/3 ÷ 10)]} × .60 = $3,508,800 $3,672,000 - $3,508,800 = $163,200.

The 10% bonds payable of Nixon Company had a net carrying amount of $2,850,000 on December 31, 2017. The bonds, which had a face value of $3,000,000, were issued at a discount to yield 12%. The amortization of the bond discount was recorded under the effective-interest method. Interest was paid on January 1 and July 1 of each year. On July 2, 2018, several years before their maturity, Nixon retired the bonds at 102. The interest payment on July 1, 2018 was made as scheduled. What is the loss that Nixon should record on the early retirement of the bonds on July 2, 2018? Ignore taxes.

b. $189,000. $2,850,000 + [($2,850,000 × .06) - ($3,000,000 × .05)] = $2,871,000 (CV of bonds) $2,871,000 - ($3,000,000 × 1.02) = $189,000.

b. $2,097,360. ($6,000,000 × .03) × 11.652 = $2,097,360.

On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. Nolte should recognize a gain or loss on the transfer of the equipment of

b. $200,000 gain. $1,450,000 - ($2,400,000 - $1,150,000) = $200,000.

On January 1, 2017, Huber Co. sold 12% bonds with a face value of $2,000,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,154,500 to yield 10%. Using the effective-interest method of amortization, interest expense for 2017 is

b. $214,836. $2,154,500 × .05 = $107,725 [$2,154,500 - ($120,000 - $107,725)] × .05 = 107,111 $107,725+$107,111 =$214,836

On January 1, Patterson Inc. issued $5,000,000, 9% bonds for $4,695,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Patterson uses the effective-interest method of amortizing bond discount. At the end of the first year, Patterson should report unamortized bond discount of

b. $285,500. ($4,695,000 × .10) - ($5,000,000 × .09) = $19,500 ($5,000,000 - $4,695,000) - $19,500 = $285,500.

On February 10, 2018, after issuance of its financial statements for 2017, Higgins Company entered into a financing agreement with Cleveland Bank, allowing Higgins Company to borrow up to $8,000,000 at any time through 2020. Amounts borrowed under the agreement bear interest at 2% above the bank's prime interest rate and mature two years from the date of loan. Higgins Company presently has $3,000,000 of notes payable with Star National Bank maturing March 15, 2018. The company intends to borrow $5,000,000 under the agreement with Cleveland and liquidate the notes payable to Star National Bank. The agreement with Cleveland also requires Higgins to maintain a working capital level of $12,000,000 and prohibits the payment of dividends on common stock without prior approval by Cleveland Bank. From the above information only, the total short-term debt of Higgins Company as of the December 31, 2017 balance sheet date is

b. $3,000,000.

The 12% bonds payable of Nyman Co. had a carrying amount of $4,160,000 on December 31, 2017. The bonds, which had a face value of $4,000,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method of amortization. Interest is paid on June 30 and December 31. On June 30, 2018, several years before their maturity, Nyman retired the bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is

b. $32,000. $4,160,000 - [($4,000,000 × .06) - ($4,160,000 × .05)] = $4,128,000 (CV of bonds) ($4,000,000 × 1.04) - $4,128,000 = $32,000.

On January 1, Martinez Inc. issued $6,000,000, 11% bonds for $6,390,000. The market rate of interest for these bonds is 10%. Interest is payable annually on December 31. Martinez uses the effective-interest method of amortizing bond premium. At the end of the first year, Martinez should report unamortized bond premium of:

b. $369,000 ($6,000,000 × .11) - ($6,390,000 × .10) = $21,000 ($6,390,000 - $6,000,000) - $21,000 = $369,000.

Venible newspapers sold 6,000 of annual subscriptions at $150 each on June 1. How much unearned revenue will exist as of December 31?

b. $375,000. (6,000 × $150) × 5/12 = $375,000.

A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2018. Historically, 10% of customers mail in the rebate form. During 2018, 3,750,000 packages of light bulbs are sold, and 200,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2018 financial statements dated December 31?

b. $375,000; $175,000 3,750,000 × .10 × $1 = $375,000; $375,000 - $200,000 = $175,000.

Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $754,350. 101. The amount of sales taxes payable (to the nearest dollar) to the state for the month of May is

b. $48,363. $49,350 × .98 = $48,363.

Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $754,350. 100. The amount of sales taxes (to the nearest dollar) for May is

b. $49,350. S + .07S = $754,350, ∴ S = $705,000. $754,350 - $705,000 = $49,350.

Crispy Frosted Flakes Company offers its customers a pottery cereal bowl if they send in 4 boxtops from Crispy Frosted Flakes boxes and $1. The company estimates that 60% of the boxtops will be redeemed. In 2018, the company sold 800,000 boxes of Frosted Flakes and customers redeemed 352,000 boxtops receiving 88,000 bowls. If the bowls cost Crispy Company $3 each, how much liability for outstanding premiums should be recorded at the end of 2018?

b. $64,000 {[(800,000 × .60) - 352,000] ÷ 4} × $2 = $64,000.

Yurman Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $960,000 at December 31, 2016 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $240,000 at December 31, 2016. Outstanding service contracts at December 31, 2016 expire as follows: During 2017 During 2018 During 2019 $200,000 $320,000 $140,000 What amount should be reported as unearned service contract revenues in Yurman's December 31, 2016 balance sheet?

b. $660,000. $200,000 + $320,000 + $140,000 = $660,000.

At the beginning of 2017, Wallace Corporation issued 10% bonds with a face value of $6,000,000. These bonds mature in the five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $5,558,400 to yield 12%. Wallace uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2017? (Round your answer to the nearest dollar.)

b. $669,018 ($5,558,400 × .06) = $333,504; [$333,504 - ($6,000,000 × .05)] = $33,504 ($5,558,400 + $33,504) × .06 = $335,514 $333,504 + $335,514 = $669,018.

Didde Company issues $25,000,000 face value of bonds at 96 on January 1, 2016. The bonds are dated January 1, 2016, pay interest semiannually at 8% on June 30 and December 31, and mature in 10 years. Straight-line amortization is used for discounts and premiums. On September 1, 2019, $15,000,000 of the bonds are called at 102 plus accrued interest. What loss would be recognized on the called bonds on September 1, 2019?

b. $680,000 loss {$24,000,000 + [$1,000,000 × (3 2/3 ÷ 10)]} × .60 = $14,620,000 $15,300,000 - $14,620,000 = $680,000.

Flavor Food Company distributes to consumers coupons which may be presented (on or before a stated expiration date) to grocers for discounts on certain products of Flavor. The grocers are reimbursed when they send the coupons to Flavor. In Flavor's experience, 50% of such coupons are redeemed, and generally one month elapses between the date a grocer receives a coupon from a consumer and the date Flavor receives it. During 2018 Flavor issued two separate series of coupons as follows: Consumer Amount Disbursed Issued On Total Value Expiration Date as of 12/31/18 1/1/18 $500,000 6/30/18 $236,000 7/1/18 840,000 12/31/18 350,000 The only journal entry recorded to date is: debit to coupon expense and credit to cash of $815,000. The December 31, 2018 balance sheet should include a liability for unredeemed coupons of:

b. $70,000. ($840,000 × .5) - $350,000 = $70,000.

Craig borrowed $700,000 on October 1, 2017 and is required to pay $720,000 on March 1, 2018. What amount is the note payable recorded at on October 1, 2017 and how much interest is recognized from October 1 to December 31, 2017?

b. $700,000 and $12,000. ($720,000 - $700,000) × 3/5 = $12,000.

At December 31, 2017 the following balances existed on the books of Foxworth Corporation: Bonds Payable $6,000,000 Discount on Bonds Payable 840,000 Interest Payable 150,000 If the bonds are retired on January 1, 2018, at 102, what will Foxworth report as a loss on redemption?

b. $960,000 ($6,000,000 × 1.02) - ($6,000,000 - $840,000) = $960,000.

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

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

A corporation called an outstanding bond obligation four years before maturity. At that time there was an unamortized discount of $1,500,000. To extinguish this debt, the company had to pay a call premium of $500,000. Ignoring income tax considerations, how should these amounts be treated for accounting purposes?

b. Charge $2,000,000 to a loss in the year of extinguishment. $1,500,000 + $500,000 = $2,000,000.

On January 1, 2018, Bacon Co. leased a building to Horner Corp. for a ten-year term at an annual rental of $175,000. At inception of the lease, Bacon received $700,000 covering the first two years' rent of $350,000 and a security deposit of $350,000. This deposit will not be returned to Horner 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 $700,000 should be shown as a current and long-term liability, respectively, in Bacon's December 31, 2018 balance sheet? Current Liability Long-term Liability

b. Current Liability-$175,000 Long-term Liability-$350,000 $175,000 and $350,000.

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?

b. Disclose the amount of the dividends in arrears.

Sandy Shoes 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 $800,000. What is the required journal entry as a result of this litigation?

b. No journal entry is required. Likelihood of loss is only possible, not probable.

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

b. Sick pay benefits vest.

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

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

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?

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

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

b. The type of litigation involved.

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

b. To assist in understanding the entity's liquidity.

When is a contingent liability recorded?

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

On January 1, 2012, Hernandez Corporation issued $18,000,000 of 10% ten-year bonds at 103. The bonds are callable at the option of Hernandez at 105. Hernandez has recorded amortization of the bond premium on the straight-line method (which was not materially different from the effective-interest method). On December 31, 2018, when the fair value of the bonds was 96, Hernandez repurchased $4,000,000 of the bonds in the open market at 96. Hernandez has recorded interest and amortization for 2018. Ignoring income taxes and assuming that the gain is material, Hernandez should report this reacquisition as

b. a gain of $196,000. = $4,036,000 (CV of retired bonds) $4,036,000 - ($4,000,000 × .96) = $196,000.

In a troubled debt restructuring in which the debt is restructured by a transfer of assets with a fair value less than the carrying amount of the debt, the debtor would recognize

b. a gain on the restructuring.

Wooten 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. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,800,000 to $9,000,000. However, the lawyer states that the most probable cost is $5,400,000. As a result of the above facts, Wooten should accrue

b. a loss contingency of $5,400,000 and disclose an additional contingency of up to $3,600,000. $5,400,000 and $3,600,000.

In a troubled debt restructuring in which the debt is continued with modified terms, a gain should be recognized at the date of restructure, but no interest expense should be recognized over the remaining life of the debt, whenever the

b. carrying amount of the pre-restructure debt is greater than the total future cash flows.

Kant Corporation retires its $500,000 face value bonds at 102 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $481,250. The entry to record the redemption will include a

b. credit of $18,750 to Discount on Bonds Payable. $500,000 - $481,250 = $18,750 discount.

On October 1, 2017 Bartley Corporation issued 5%, 10-year bonds with a face value of $8,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. 79. The entry to record the issuance of the bonds would include a

b. credit of $320,000 to Premium on Bonds Payable. ($8,000,000 × 1.04) - $8,000,000 = $320,000 premium.

Carr Corporation retires its $500,000 face value bonds at 105 on January 1, following the payment of interest. The carrying value of the bonds at the redemption date is $518,725. The entry to record the redemption will include a

b. debit of $18,725 to Premium on Bonds Payable. $518,725 - $500,000 = $18,725 premium.

Greeson Corp. signed a three-month, zero-interest-bearing note on November 1, 2017 for the purchase of $500,000 of inventory. The face value of the note was $507,800. Assuming Greeson 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, 2017 will include a

b. debit to Interest Expense for $5,200. ' $507,800 - $500,000 = $7,800. $7,800 × 2/3 = $5,200.

The face value of bonds is also called each of the following except

b. stated value.

Martinez 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

b. the minimum of the range.

Reich, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that

b. the nominal rate of interest exceeded the market rate.

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

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

At December 31, 2017 the following balances existed on the books of Rentro Corporation: Bonds Payable $7,000,000 Discount on Bonds Payable 980,000 Interest Payable 168,000 If the bonds are retired on January 1, 2018, at 102, what will Rentro report as a loss on redemption?

c. $1,120,000 ($7,000,000 × 1.02) - ($7,000,000 - $980,000) = $1,120,000.

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using effective-interest amortization, how much interest expense will be recognized in 2017?

c. $1,176,373 ($14,703,108 × .04) + 14,706,232 × .04) = $1,176,373.

In recent year Cey Corporation had net income of $750,000, interest expense of $150,000, and a times interest earned ratio of 9. What was Cey Corporation's income before taxes for the year?

c. $1,200,000 ($750,000 + $150,000 + X) ÷ $150,000 = 9 ($900,000 + X) = 9 × $150,000 X = $450,000; IBT = $1,200,000 ($750,000 + $450,000).

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using effective-interest amortization, how much interest expense will be recognized in 2017?

c. $1,960,623 ($24,505,180 × .04) + ($24,510,387 × .04) = $1,960,623.

The times interest earned is computed by dividing

c. income before income taxes and interest expense by interest expense.

A company gives each of its 75 employees (assume they were all employed continuously through 2017 and 2018) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2017, they made $21 per hour and in 2018 they made $24 per hour. During 2018, they took an average of 9 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2017 and 2018 balance sheets, respectively?

c. $151,200; $216,000 75 × 12 × 8 × $21 = $151,200; 75 × 15 × 8 × $24 = $216,000.

Excom manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $300 per unit sold and reported a liability for estimated warranty costs $10.4 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $324 million and paid warranty claims of $12,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year?

c. $16,400,000. $10,400,000 + (60,000 × $300) - $12,000,000 = $16,400,000.

A company gives each of its 75 employees (assume they were all employed continuously through 2017 and 2018) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2017, they made $24.50 per hour and in 2018 they made $28 per hour. During 2018, they took an average of 9 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2017 and 2018 balance sheets, respectively?

c. $176,400; $252,000 75 × 12 × 8 × $24.50 = $176,400; 75 × 15 × 8 × $28 = $252,000.

Feller Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2017 at 97 plus accrued interest. The bonds are dated January 1, 2017, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

c. $19,700,000 ($20,000,000 × .97) + ($1,800,000 × 2/12) = $19,700,000

Parton owes $3 million that is due on February 28. The company borrows $2,400,000 on February 25 (5-year note) and uses the proceeds to pay down the $3 million note and uses other cash to pay the balance. How much of the $3 million note is classified as longterm in the December 31 financial statements?

c. $2,400,000.

Everhart Company issues $25,000,000, 6%, 5-year bonds dated January 1, 2017 on January 1, 2017. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

c. $26,094,045 ($25,000,000 × .78120) + ($750,000 × 8.75206) = $26,094,045.

On January 1, 2018, Huff Co. sold $5,000,000 of its 10% bonds for $4,426,480 to yield 12%. Interest is payable semiannually on January 1 and July 1. What amount should Huff report as interest expense for the six months ended June 30, 2018?

c. $265,589 $4,426,480 × .06 = $265,589.

On January 2, 2017, a calendar-year corporation sold 8% bonds with a face value of $3,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $2,768,000 to yield 10%. Using the effectiveinterest method of computing interest, how much should be charged to interest expense in 2017?

c. $277,720. $2,768,000 × .05 = $138,400 [$2,768,000 + ($138,400 - $120,000)] × .05 = $139,320 $138,400+$139,320= $277,720

Farmer Company issues $30,000,000 of 10-year, 9% bonds on March 1, 2017 at 97 plus accrued interest. The bonds are dated January 1, 2017, and pay interest on June 30 and December 31. What is the total cash received on the issue date?

c. $29,550,000 ($30,000,000 × .97) + ($2,700,000 × 2/12) = $29,550,000.

On January 1, 2018, Jacobs Company sold property to Dains Company which originally cost Jacobs $2,660,000. There was no established exchange price for this property. Danis gave Jacobs a $4,200,000 zero-interest-bearing note payable in three equal annual installments of $1,400,000 with the first payment due December 31, 2018. The note has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a $4,200,000 note payable in three equal annual installments of $1,400,000 at a 10% rate of interest is $3,481,800. What is the amount of interest income that should be recognized by Jacobs in 2018, using the effective-interest method?

c. $348,180. $3,481,800 × .10 = $348,180.

Valley, Inc., is a retail store operating in a state with a 5% retail sales tax. The state law provides that the retail sales tax collected during the month must be remitted to the state during the following month. If the amount collected is remitted to the state on or before the twentieth of the following month, the retailer may keep 3% of the sales tax collected. On April 10, 2017 Valley remitted $203,700 tax to the state tax division for March 2017 retail sales. What was Valley's March 2017 retail sales subject to sales tax?

c. $4,200,000. 05S × .97 = $203,700, ∴ S = $4,200,000.

At the beginning of 2017, Winston Corporation issued 10% bonds with a face value of $4,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $3,705,600 to yield 12%. Winston uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2017? (Round your answer to the nearest dollar.)

c. $446,012 ($3,705,600 × .06) = $222,336; [$222,336 - ($4,000,000 × .05)] = $22,336 ($3,705,600 + $22,336) × .06 = $223,676 $222,336 + $223,676 = $446,012

Downing Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2017 on January 1, 2017. The bonds pay interest semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds from the bond issue? 2.5% 3.0% 5.0% 6.0% Present value of a single sum for 5 periods .88385 .86261 .78353 .74726 Present value of a single sum for 10 periods .78120 .74409 .61391 .55839 Present value of an annuity for 5 periods 4.64583 4.57971 4.32948 4.21236 Present value of an annuity for 10 periods 8.75206 8.53020 7.72173 7.36009

c. $5,218,809 ($5,000,000 × .78120) + ($150,000 × 8.75206) = $5,218,809.

Core Trading Stamp Co. records stamp service revenue and provides for the cost of redemptions in the year stamps are sold to licensees. Core's past experience indicates that only 75% of the stamps sold to licensees will be redeemed. Core's liability for stamp redemptions was $7,500,000 at December 31, 2017. Additional information for 2018 is as follows: Stamp service revenue from stamps sold to licensees $6,000,000 Cost of redemptions 4,980,000 If all the stamps sold in 2018 were presented for redemption in 2019, the redemption cost would be $4,500,000. What amount should Core report as a liability for stamp redemptions at December 31, 2018?

c. $5,895,000. ($4,500,000 × .75) + $7,500,000 - $4,980,000 = $5,895,000.

On September 1, 2017, Halley Co. issued a note payable to Fidelity Bank in the amount of $2,700,000, bearing interest at 10%, and payable in three equal annual principal payments of $900,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2018. At December 31, 2018, Halley should record accrued interest payable of

c. $60,000. $1,800,000 × .10 × 4/12 = $60,000.

The total payroll of Trolley Company for the month of October, 2017 was $960,000, of which $180,000 represented amounts paid in excess of $118,500 to certain employees. $600,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes. $180,000 of federal income taxes and $18,000 of union dues were withheld. The state unemployment tax is 1%, the federal unemployment tax is .8%, and the current F.I.C.A. tax is 7.65% on an employee's wages to $118,500 and 1.45% in excess of $118,500. What amount should Trolley record as payroll tax expense?

c. $68,760. ($780,000 × 7.65%) + ($180,000 × 1.45%) + ($360,000 × 1.8%) = $68,760

Paige Co. took advantage of market conditions to refund debt. This was the fourth refunding operation carried out by Paige within the last three years. The excess of the carrying amount of the old debt over the amount paid to extinguish it should be reported as a

c. part of continuing operations.

On June 30, 2018, Omara Co. had outstanding 8%, $8,000,000 face amount, 15-year bonds maturing on June 30, 2028. Interest is payable on June 30 and December 31. The unamortized balance in the bond discount account on June 30, 2018 was $360,000. On June 30, 2018, Omara acquired all of these bonds at 94 and retired them. What net carrying amount should be used in computing gain or loss on this early extinguishment of debt?

c. $7,640,000. $8,000,000 - ($360,000) = $7,640,000.

On October 1, 2017 Bartley Corporation issued 5%, 10-year bonds with a face value of $8,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. 80. Bond interest expense reported on the December 31, 2017 income statement of Bartley Corporation would be

c. $92,000 [($8,000,000 × .05) × 3/12] - [($320,000 ÷ 10) × 3/12] = $92,000.

The December 31, 2017, balance sheet of Hess Corporation includes the following items: 9% bonds payable due December 31, 2026 $5,000,000 Unamortized premium on bonds payable 135,000 The bonds were issued on December 31, 2016, at 103, with interest payable on July 1 and December 31 of each year. Hess uses straight-line amortization. On March 1, 2018, Hess retired $2,000,000 of these bonds at 98 plus accrued interest. What should Hess record as a gain on retirement of these bonds? Ignore taxes.

c. $93,000. $5,135,000 - ($135,000/18) 18 6 = $2,053,000 (CV of retired bonds) $2,053,000 - ($2,000,000 × .98) = $93,000.

Presented below is information available for Marley Company. Current Assets Cash $ 4,000 Short-term investments 55,000 Accounts receivable 61,000 Inventory 110,000 Prepaid expenses 30,000 Total current assets $260,000 Total current liabilities are $100,000. The acid-test ratio for Marley is:

c. 1.20 to 1 $4,000 + $55,000 + $61,000/ $100,000 = 1.20 to 1.

Which of the following is a current liability?

c. A cash dividend payable to preferred stockholders

In March 2018, an explosion occurred at Kirk Co.'s plant, causing damage to area properties. By May 2018, 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 $5,000,000 would be a reasonable estimate of the damages. Kirk's $6,000,000 comprehensive public liability policy contains a $500,000 deductible clause. In Kirk's December 31, 2017 financial statements, for which the auditor's fieldwork was completed in April 2018, how should this casualty be reported?

c. As a note disclosing a possible liability of $500,000.

Which of the following items is a current liability?

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

Which of the following best describes the accounting for assurance-type warranty costs?

c. Expensed based on estimate in year of sale.

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

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

Under IFRS, which of the following is used to measure a liability, if a range of estimates is predicted and no amount in the range is more likely than any other amount in the range?

c. Mid-point of the range

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

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

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

c. short-term obligations expected to be refinanced.

Overton Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2017. Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Overton recall all cans of this paint sold in the last six months. The management of Overton estimates that this recall would cost $800,000. What accounting recognition, if any, should be accorded this situation?

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

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

c. Selling magazine subscriptions.

Which of the following taxes does not represent a common employee payroll deduction? a. Federal income taxes.

c. State unemployment taxes.

A corporation borrowed money from a bank to build a building. The long-term note signed by the corporation is secured by a mortgage that pledges title to the building as security for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay the loan. Which of the following relationships can you expect to apply to the situation?

c. The amount of interest expense will decrease each period the loan is outstanding, while the portion of the annual payment applied to the loan principal will increase each period.

What does the current ratio inform you about a company?

c. The company's liquidity.

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

c. The discount represents the cost of borrowing.

If a company chooses the fair value option, a decrease in the fair value of the liability is recorded by crediting

c. Unrealized Holding Gain/Loss-Income.

For which of the following areas a provision may be recognized in the financial statement?

c. Warranties

"In-substance defeasance" is a term used to refer to an arrangement whereby

c. a company provides for the future repayment of a long-term debt by placing purchased securities in an irrevocable trust.

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows,

c. a new effective-interest rate must be computed.

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

c. be accrued during the period when earned.

In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, the creditor should

c. calculate its loss using the historical effective rate of the loan.

When a company enters into what is referred to as off-balance-sheet financing, the company

c. can enhance the quality of the balance sheet and permits credit to be obtained more readily and at less cost.

If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

c. credit to Interest Expense.

A ten-year bond was issued in 2016 at a discount with a call provision to retire the bonds. When the bond issuer exercised the call provision on an interest date in 2018, the carrying amount of the bond was less than the call price. The amount of bond liability removed from the accounts in 2018 should have equaled the

c. face amount less unamortized discount.

Bond interest paid is equal to the

c. face amount of the bonds multiplied by the stated interest rate.

Both IFRS and U.S. GAAP permit valuation of long-term debt and other liabilities at

c. fair value with gains and losses on changes in fair value recorded in income in certain situations.

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

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

On January 3, 2018, Benton Corp. owned a machine that had cost $400,000. The accumulated depreciation was $240,000, estimated salvage value was $24,000, and fair value was $640,000. On January 4, 2018, this machine was irreparably damaged by Pogo Corp. and became worthless. In October 2018, a court awarded damages of $480,000 against Pogo in favor of Benton. At December 31, 2018, the final outcome of this case was awaiting appeal and was, therefore, uncertain. However, in the opinion of Benton's attorney, Pogo's appeal will be denied. At December 31, 2018, what amount should Benton accrue for this gain contingency?

d. $0. $0, gain contingencies are not accrued.

On December 31, 2017, Isle Co. has $6,000,000 of short-term notes payable due on February 14, 2018. On January 10, 2016, Isle arranged a line of credit with Beach Bank which allows Isle to borrow up to $4,500,000 at one percent above the prime rate for three years. On February 2, 2018, Isle borrowed $3,600,000 from Beach Bank and used $1,500,000 additional cash to liquidate $5,100,000 of the short-term notes payable. The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2017 balance sheet which is issued on March 5, 2018 is

d. $2,400,000. $6,000,000 - $3,600,000 = $2,400,000.

Included in Vernon Corp.'s liability account balances at December 31, 2017, were the following: 7% note payable issued October 1, 2017, maturing September 30, 2018 $375,000 8% note payable issued April 1, 2017, payable in six equal annual installments of $225,000 beginning April 1, 2018 900,000 Vernon's December 31, 2017 financial statements were issued on March 31, 2018. On January 15, 2018, the entire $900,000 balance of the 8% note was refinanced by issuance of a long-term obligation payable in a lump sum. In addition, on March 10, 2018, Vernon consummated a noncancelable agreement with the lender to refinance the 7%, $375,000 note on a long-term basis, on readily determinable terms that have not yet been implemented. On the December 31, 2017 balance sheet, the amount of the notes payable that Vernon should classify as short-term obligations is

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

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. What is interest expense for 2018, using straight-line amortization?

d. $1,184,845 ($15,000,000 × .078) + ($296,892 ÷ 20) = $1,184,845.

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2017. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. What is interest expense for 2018, using straight-line amortization?

d. $1,974,741 ($25,000,000 × .078) + ($494,820 ÷ 20) = $1,974,741.

Muggs Co. includes one coupon in each bag of dog food it sells. In return for eight coupons, customers receive a leash. The leashes cost Muggs $4 each. Muggs estimates that 45 percent of the coupons will be redeemed. Data for 2017 and 2018 are as follows: 2017 2018 Bags of dog food sold 500,000 600,000 Leashes purchased 18,000 22,000 Coupons redeemed 120,000 150,000 127. The premium expense for 2017 is

d. $112,500. [(500,000 × .45) ÷ 8] × $4 = $112,500.

d. $112,500. {[(600,000 × .45) - 150,000] ÷ 8} × $4 = $60,000. $60,000 + $52,500 = $112,500.

Vanco Company has 70 employees who work 8-hour days and are paid hourly. On January 1, 2017, the company began a program of granting its employees 10 days of paid vacation each year. Vacation days earned in 2017 may first be taken on January 1, 2018. Information relative to these employees is as follows: Hourly Vacation Days Earned Vacation Days Used Year Wages by Each Employee by Each Employee 2017 $20.50 10 0 2018 22.50 10 8 2019 25.50 10 10 Vanco has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. 110. What is the amount of expense relative to compensated absences that should be reported on Vanco's income statement for 2017?

d. $114,800. $20.50 × 8 × 10 × 70 = $114,800.

A company issues $15,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and December 31. The proceeds from the bonds are $14,703,108. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2018?

d. $14,747,642 $14,703,108 + ($296,892 × 3/20) = $14,747,642.

Eddy Co. is indebted to Cole under a $1,000,000, 12%, three-year note dated December 31, 2016. Because of Eddy's financial difficulties developing in 2018, Eddy owed accrued interest of $120,000 on the note at December 31, 2018. Under a troubled debt restructuring, on December 31, 2018, Cole agreed to settle the note and accrued interest for a tract of land having a fair value of $900,000. Eddy's acquisition cost of the land is $725,000. Ignoring income taxes, on its 2018 income statement Eddy should report as a result of the troubled debt restructuring Gain on Disposal Restructuring Gain

d. $175,000 $220,000 Gain on Disposal-$175,000 Restructuring Gain- $220,000 $900,000 - $725,000 = $175,000 ($1,000,000 + $120,000) - $900,000 = $220,000.

Roxy Co., which has a taxable payroll of $800,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Roxy Co.?

d. $22,400 [(.062 - .054) + .02] × $800,000 = $22,400.

On January 1, 2013, Goll Corp. issued 3,000 of its 10%, $1,000 bonds for $3,120,000. These bonds were to mature on January 1, 2023 but were callable at 101 any time after December 31, 2016. Interest was payable semiannually on July 1 and January 1. On July 1, 2018, Goll called all of the bonds and retired them. Bond premium was amortized on a straight-line basis. Before income taxes, Goll's gain or loss in 2018 on this early extinguishment of debt was

d. $24,000 gain. ($3,120,000- ((120,000/20)x11))- ($3,000,000 × 1.01) = $24,000.

A company issues $25,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2016. Interest is paid on June 30 and December 31. The proceeds from the bonds are $24,505,180. Using straight-line amortization, what is the carrying value of the bonds on December 31, 2018?

d. $24,579,403 $24,505,180 + ($494,820 × 3/20) = $24,579,403.

On October 1, 2017 Macklin Corporation issued 5%, 10-year bonds with a face value of $6,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis. 77. The entry to record the issuance of the bonds would include a credit of

d. $240,000 to Premium on Bonds Payable. ($6,000,000 × 1.04) - $6,000,000 = $240,000 premium.

The adjusted trial balance for Lifesaver Corp. at the end of the current year, 2018, contained the following accounts. 5-year Bonds Payable 8% $3,000,000 Interest Payable 50,000 Premium on Bonds Payable 100,000 Notes Payable (3 months.) 40,000 Notes Payable (5 yr.) 165,000 Mortgage Payable ($15,000 due currently) 200,000 Salaries and Wages Payable 18,000 Income Taxes Payable (due 3/15 of 2019) 25,000 The total long-term liabilities reported on the balance sheet are

d. $3,450,000. $3,000,000 + $100,000 + $165,000 + ($200,000 - $15,000) = $3,450,000.

During 2016, Rao Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) Sales Actual Warranty Expenditures 2016 $ 1,600,000 $ 39,000 2017 2,500,000 65,000 2018 2,100,000 135,000 $6,200,000 $239,000 What amount should Rao report as a liability at December 31, 2018?

d. $319,000 ($6,200,000 × .09) - $239,000 = $319,000.

Palco Co., which has a taxable payroll of $1,200,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%. However, because of stable employment experience, the company's state rate has been reduced to 2%. What is the total amount of federal and state unemployment tax for Palco Co.?

d. $33,600 [(.062 - .054) + .02] × $1,200,000 = $33,600.

Slack Inc. borrowed $400,000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31?

d. $36,000. $400,000 × .12 × 9/12 = $36,000.

On December 31, 2015, Nolte Co. is in financial difficulty and cannot pay a note due that day. It is a $3,000,000 note with $300,000 accrued interest payable to Piper, Inc. Piper agrees to accept from Nolte equipment that has a fair value of $1,450,000, an original cost of $2,400,000, and accumulated depreciation of $1,150,000. Piper also forgives the accrued interest, extends the maturity date to December 31, 2018, reduces the face amount of the note to $1,250,000, and reduces the interest rate to 6%, with interest payable at the end of each year. *104. Nolte should recognize a gain on the partial settlement and restructure of the debt of

d. $375,000. ($3,000,000 + $300,000) - [$1,450,000 + $1,250,000 + ($1,250,000 × .06 × 3)] = $375,000.

d. $52,500. [(225,000 - 120,000) ÷ 8] × $4 = $52,500.

Which of the following is a condition for accruing a liability for the cost of compensation for future absences?

d. All of these are conditions for the accrual.

During 2017, Eaton Co. introduced a new product carrying a two-year warranty against defects. The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale. Sales and actual warranty expenditures for the years ended December 31, 2017 and 2018 are as follows: Actual Warranty Sales Expenditures 2017 $ 800,000 $12,000 2018 1,000,000 35,000 $1,800,000 $47,000 At December 31, 2018, (assuming the accrual method) Eaton should report an estimated warranty liability of

d. $61,000. ($1,800,000 × .06) - $47,000 = $61,000.

On its December 31, 2017 balance sheet, Emig Corp. reported bonds payable of $6,000,000 The bonds had been issued at par. On January 2, 2018, Emig retired $3,000,000 of the outstanding bonds at par plus a call premium of $70,000. What amount should Emig report in its 2018 income statement as loss on extinguishment of debt (ignore taxes)?

d. $70,000 ($3,000,000 + $70,000) - ($6,000,000) × 1/2) = $70,000.

During 2016, Salton Co. introduced a new line of machines that carry a three-year warranty against manufacturer's defects. Based on industry experience, warranty costs are estimated at 1% of sales in the year of sale, 2% in the year after sale, and 3% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: Sales Actual Warranty Expenditures 2016 $ 1,400,000 $ 26,000 2017 1,000,000 40,000 2018 1,400,000 90,000 $3,800,000 $156,000 What amount should Salton report as a liability at December 31, 2018?

d. $72,000 ($3,800,000 × .06) - $156,000 = $72,000.

Roasten Corp.'s payroll for the pay period ended October 31, 2018 is summarized as follows: Federal Amount of Wages Subject Department Total Income Tax to Payroll Taxes Payroll Wages Withheld F.I.C.A. Unemployment Factory $ 75,000 $ 9,000 $70,000 $32,000 Sales 22,000 3,000 16,000 2,000 Office 18,000 2,000 8,000 — $115,000 $14,000 $94,000 $34,000 Assume the following payroll tax rates: F.I.C.A. for employer and employee 8% each Unemployment 3% What amount should Roasten accrue as its share of payroll taxes in its October 31, 2018 balance sheet?

d. $8,540. ($94,000 × .08) + ($34,000 × .03) = $8,540

Composite provides extended service contracts on electronic equipment sold through major retailers. The standard contract is for four years. During the current year, Composite provided 42,000 such warranty contracts at an average price of $162 each. Related to these contracts, the company spent $800,000 servicing the contracts during the current year and expects to spend $4,200,000 more in the future. What is the net profit that the company will recognize in the current year related to these contracts?

d. $901,000. [(42,000 × $162) ÷ 4 yrs.] - $800,000 = $901,000.

Fox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. 29. One step in calculating the issue price of the bonds is to multiply the face value by the table value for

d. 20 periods and 4% from the present value of 1 table.

Putnam Company's 2018 financial statements contain the following selected data: Income taxes $40,000 Interest expense 25,000 Net income 60,000 Putnam's times interest earned for 2018 is

d. 5.0 times. $60,000 + $40,000 + $25,000/$25,000 =5.0 times

The effective interest on a 12-month, zero-interest-bearing note payable of $400,000, discounted at the bank at 7% is

d. 7.53%. $28,000 ÷ ($400,000 - $28,000) = 0.0753 = 7.53%.

All of the following are differences between IFRS and U.S. GAAP in accounting for liabilities except:

d. U.S. GAAP, but not IFRS uses the term "provisions" for contingent liabilities which are accrued.

What is a contingency?

d. 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 some gain contingencies?

d. As a disclosure only.

Qualpoint pays a weekly payroll of $255,000 that includes federal taxes withheld of $38,100, FICA taxes withheld of $23,670, and 401(k) withholdings of $27,000. What is the ffect of assets and liabilities from this transaction?

d. Assets decrease $166,230 and liabilities increase $88,770. $38,100 + $23,670 + $27,000 = $88,770; $255,000 - $88,770 = $166,230.

Bargain Surplus made cash sales during the month of October of $375,000. 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?

d. Credit Sales Taxes Payable for $22,500. $375,000 × .06 = $22,500.

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

d. Current liability.

Xtra Processes is involved with innovative approaches to finding energy reserves. Xtra recently built a facility to extract natural gas at a cost of $12 million. However, Xtra is also legally responsible to remove the facility at the end of its useful life of twenty years. This cost is estimated to be $17 million (the present value of which is $6.5 million). What is the journal entry required to record the asset retirement obligation?

d. Debit Natural Gas Facility for $6,500,000 and credit Asset Retirement Obligation for $6,500,000. Present value of the removal cost.

A company buys an oil rig for $3,000,000 on January 1, 2018. 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 2018 as a result of these events?

d. Depreciation expense of $323,133 and interest expense of $23,133 ($3,000,000 + $231,330) ÷ 10 = $323,133; $231,330 × .10 = $23,133.

A company buys an oil rig for $5,000,000 on January 1, 2018. The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $1,000,000 (present value at 10% is $385,550). 10% is an appropriate interest rate for this company. What expense should be recorded for 2018 as a result of these events?

d. Depreciation expense of $538,555 and interest expense of $38,555 ($5,000,000 + $385,550) ÷ 10 = $538,555; $385,550 × .10 = $38,555.

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.

d. Either 1 or 2 is acceptable.

Which of the following statements is false?

d. 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 the following is not considered a part of the definition of a liability?

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

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

d. Probable.

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

d. Subsequently refinance the obligation on a long-term basis.

Which of the following must be disclosed relative to long-term debt maturities and sinking fund requirements?

d. The amount of future payments for sinking fund requirements and long-term debt maturities during each of the next five years.

Which of the following arguments is presented by FASB to explain why a gain is recorded by a company when its creditworthiness is becoming worse?

d. The debtholders' loss is the shareholders' gain.

How do you determine the acid-test ratio?

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

Holland Company estimates its annual warranty expense as 3% of annual net sales. The following data relate to the calendar year 2018: Net sales $1,500,000 Warranty liability account Balance, Dec. 31, 2018 $10,000 debit before adjustment Balance, Dec. 31, 2018 20,000 credit after adjustment Which one of the following entries was made to record the 2018 estimated warranty expense?

d. Warranty Expense ................................................................ 45,000 Warranty Liability ....................................................... 45,000 $1,500,000 × .03 = $45,000.

Premium on bonds payable is

d. an adjunct account.

Accrued liabilities are disclosed in financial statements by

d. appropriately classifying them as regular liabilities in the balance sheet.

Long-term debt that matures within one year and is to be converted into stock should be reported

d. as noncurrent and accompanied with a note explaining the method to be used in its liquidation.

Stock dividends distributable should be classified on the

d. balance sheet as an item of stockholders' equity.

The numerator of the acid-test ratio consists of

d. cash, marketable securities, and net receivables.

The interest rate written in the terms of the bond indenture is known as the

d. coupon rate, nominal rate, or stated rate.

The rate of interest actually earned by bondholders is called the

d. effective rate.

A troubled debt restructuring will generally result in a

d. gain by the debtor and a loss by the creditor.

Bonds that pay no interest unless the issuing company is profitable are called

d. income bonds.

When the effective-interest method is used to amortize bond premium or discount, the periodic amortization will

d. increase if the bonds were issued at either a discount or a premium.

When the interest payment dates of a bond are May 1 and November 1, and a bond issue is sold on June 1, the amount of cash received by the issuer will be

d. increased by accrued interest from May 1 to June 1.

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

d. inventory.

A contingent liability

d. is the result of a loss contingency.

Note disclosures for long-term debt generally include all of the following except

d. names of specific creditors.

Liabilities are

d. 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

d. portion of FICA taxes and any union dues.

Contingent assets need not be disclosed in the financial statements or in the notes if they are:

d. possible but not probable to occur.

In a service-type warranty, warranty revenue is

d. recognized equally over the warranty period.

Accounting for product warranty costs under an assurance-type warranty

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

Darren 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

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

Under the effective-interest method of bond discount or premium amortization, the periodic interest expense is equal to

d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.

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

d. 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

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

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