ACCT 3230 - Chapter 13 - LearnSmart

When employees have provided services for which they have not been paid by the financial statement date, the employer must recognize

an accrued liability compensation expense

Recognition of costs related to manufacturers' quality assurance warranty during the same period that the related revenue is recognized is consistent with the

matching principle

Material events giving rise to a contingency that occur after the end of the fiscal period but before the financial statements are issued

must be disclosed in a subsequent events disclosure note.

Which of the following statements regarding commercial paper are correct?

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

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

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

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

considered to clarify financial statement elements at the reporting date

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

contingent loss

Revenue related to extended warranty contracts typically is recognized

over time

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

revenue

The feature that distinguishes loss contingencies from other liabilities is the

uncertainty that a loss will occur

Supreme Inc. sells its products with a 3-year warranty. The company estimates warranty costs relating to sales during 2017 as follows: $10,000; 2018: $25,000; 2019: $15,000. Assume that actual warranty costs during 2017 were as estimated. What is the amount of warranty expense that Supreme should recognize in its 2017 income statement?

$10,000 + $25,000 + $15,000 = $50,000

Wagner Company's financial records show that it has a mortgage that requires monthly principal payments of $3,000. The mortgage loan matures in 15 years. What should Wagner show on its balance sheet at the end of the current year?

A concurrent liability of $504,000 ($3,000 x 12 x 14 years). A current liability of $36,000 ($3,000 x 12).

Which of the following are common examples of accrued liabilities?

Income tax payable Wages and salaries payable Interest payable

In practice, the assets most commonly used to secure loans are

Inventory Account receivable

Classifying liabilities as current or concurrent depends on when the contingent liability is expected to be _____________.

settled; satisfied; paid

Abbott Corp.'s attorney estimates that the company will ultimately have to pay between $350,000 and $500,000 relating to current litigation, and that the most likely amount of the loss will be equal to $400,000. Abbott Corporation should accrue a contingent liability and loss of

$400,000

Which of the following represent the correct accounting treatment for loss contingencies that do not meet the criteria for accrual but are at least reasonably possible?

A disclosure must describe the contingency. An estimate of the potential loss should be made (if possible) and disclosed.

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

Future; past

Choose the statement that best reflects the nature of interest

Interest is the "rent" paid by the borrower for using the lender's money

For a loss contingency to be accrued:

It is not necessary that the lawsuit was filed before the end of the accounting period. The cause of the lawsuit must have been occurred before the end of the accounting period.

The dollar amount of a potential loss from a contingent liability can be classified as

Known Reasonably estimable

Which of the following situations would give rise to an employee-related accrued liability as of December 31 of the current year?

Labor negotiations resulted in a 4% pay increase retroactively applied to December of the current year. Employee bonuses earned during the year have not yet been paid.

What type of costs relating to ongoing litigation are commonly recognized by companies?

Lawyer fees and other legal costs

Which of the following items represent loss contingencies?

Legal liabilities Uncollectible receivables Warranty liabilities

Which of the following represents the formal credit instrument for a trade notes payable?

Promissory note

Information relative to a loss contingency that becomes available after the fiscal year ends, but before the financial statement date:

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

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

Supplier's invoice

Eric Company's accountant properly accrued a liability for sick leave that was not taken by the company's employees during the current year. Which of the following conditions caused the accountant to accrued a liability for the employees' unused sick leave?

The company has a policy to pay employees for unused sick leave.

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

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

Which of the following statements regarding noninterest-bearing notes is correct?

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

Identify the statement that best describes the discrimination definition for classifying a liability as current.

The liability is expected to be satisfied from current assets.

What conditions must be met to recognize employee compensation for future absences?

The paid absences vest or the benefits can be accumulated over time. The obligation is attributable to employees' services already performed. Payment is probable. The amount can be reasonably estimated.

Which of the following is necessary for a loss contingency to exist?

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

Which of the following transactions require recognition of a liability on December 31? The utility bill for December will be paid on January 3. Receipt of inventory purchases on account. Employees are promised a 4% pay raise starting next month.

The utility bill for December will be paid January 3. Receipt of inventory purchases on account.

Which of the following is an important characteristic of loss contingencies that is not commonly shared by other liabilities?

Uncertainty exists regarding whether a future event giving rise to the obligation will occur.

Which of the following represents an accrued liability?

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

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

accounts payable

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

accrued interest payable

Earnings-per-share, net income, and operating income are commonly used financial performance indicators used to determine:

annual bonuses

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

before the financial statement date.

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

commercial paper

Generally, a current liabilities is expected to be satisfied from ____________ _______________.

current assets

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

decrease

Glocken Company is trying to increase its share of the customer electronics market. To stimulate sales, the company offers cash rebates ranging from $25-$50 on all of its products. At December 31, 2017, the company estimates that, during 2018, customers will redeem $2,550 in rebates relating to 2017 sales. On December 31, 2017, Glocken should

decrease revenue and recognize a liability for $2,550

The costs of satisfying product-related warranties should be recorded as an expense

during the year of sale

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

in the same period as the warranty revenue

Bonuses are accrued and recognized in the financial statements in the period

in which they are earned

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

liabilities

The most common way for corporations to obtain temporary financing is

through short-term bank loans

Obligations to suppliers of merchandise that bear interest and are for a longer term than open accounts are called: commercial paper trade notes payable accounts payable customer advances contingencies

trade notes payable

Short-term bank loans:

usually have a lower interest rate than long-term debt; are frequently used by large corporations as a significant component of capital structure.