Exam SB Review
Mikel Company grants stock options and bonuses to its full-time employees. These benefits are considered employee ______.
Compensation
Unearned or deferred revenues are reported as
liabilities
Growler Commercial Cleaning Company collects a $1,000 deposit associated with the rental of industrial cleaning equipment. The deposit is refundable when the customer returns the equipment. Upon receipt of the deposit, Growler should credit a
liability- refundable deposit
The expected cash flow approach is the appropriate method for estimating _____ _____ contingent liabilities
long term
Smithson sells goods to customers in exchange for a note requiring payment of $100,000 in one year plus interest at 10%. At what amount is the note payable reflected on the customer's balance sheet?
$100,000 (the note is shown as the face amount. Interest is reported in a separate account)
Smithson sells goods to customers in exchange for a note requiring payment of $100,000 in one year plus interest at 10%. At what amount is the note receivable reflected on Smithson's balance sheet
$100,000 (Interest is recorded separately)
On January 1, Western Corp. borrows $100,000 from FirstBank using a six-month, 10% promissory note. Interest and principal are payable at maturity. The journal entry on January 1 includes (Select all that apply.)
(Havnt paid interest yet) Debit Cash- 100000 Credit Notes Payable- 100000
On January 1, year 1, Coral deposits $10,000 into a savings account earning 9% interest for 5 years. What is the future value of Coral's investment at the end of year 5?
(Using FV of $1) i=9% n=5 FV factor=1.53862 PV=$10,000 FV=PV*FV factor FV=$15,386
Greenbaum Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $20,000 (40%) and $30,000 (60%); Year 2: $30,000 (70%); $20,000 (30%).The company's effective interest rate is 5%. Calculate the estimated warranty liability using the expected cash flow method
(using pv of $1) [((20k*0.4)+(30k*0.6))(0.95238)]+[((30k*0.7)+(20k*0.3))(0.90703)]= $49251
When employees have provided services for which they have not been paid by the financial statement date, the employer must recognize (Select all that apply.)
-An accrued liability -Compensation expense
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
Which of the following situations would give rise to an employee-related accrued liability as of December 31 of the current year? (Select all that apply.)
-Labor negotiations resulted in a 4% pay increase retroactively applied to December of the current year -Employee bonuses earned during thhe year have not yet been paid
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
A contingent liability typically is accrued for product warranties because it meets which of the following criteria?
-The amount of the future loss can be reasonably estimated -A future loss is probable
What conditions must be met to recognize employee compensation for future absences?
-Thhe paid absences vest or the benefits can be acumulated over time -The obligation is attributable to employees' services already performed -The amount can be reasonably estimated -Payment is probable
Examples of loss contingencies:
-Uncollectible receivables -Warranty liabilities -Legal liabilities
Short term bank loans:
-Usually have lower interest rates than long term debt -are frequently ysed by large corporations as a significant component of capital structure
Accounts payable typically:
-are offered on open account -are noninterest bearing
Which of the following are common types of transactions that are recognized as "advances from customers?"
-gift certificates and cards -airline tickets -magazine subscriptions
Which of the following are commonly used nonfinancial performance measures for annual bonuses?
-product or service quality -customer satisfaction
For a loss contingency to be accrued
-the cause of the lawsuit must have occurred before the end of the accounting period -it is not necessary that the lawsuit was filed before the end of the accounting period
Which of the following represent differences between U.S. GAAP and IFRS with respect to loss contingencies?
-the definition of "probable" -the term used for accrued contingent liabilities -The measurement of accrued contingent liabilities
On December 1, 2017, Kathryn Corp. borrows $100,000 from its bank and signs a 6-month, 12% promissory note. How many months of interest should be recognized in 2017?
1 month (December)
Identify the steps necessary to determine whether unasserted claims or assessments should be recognized or disclosed
1) Assess probability of whether claims will be asserted 2) If probability conditions are met, treat the claim as if they had been asserted 3)Recognize contingency if conditions are met and amount can be estimated; otherwise disclose
If you invest $1,000 in a savings account with semiannual compounding at 12%, what is the interest rate per compounding period?
12/2=6%
Carter Co. signs a $150,000 noninterest-bearing 5-year note payable for goods purchased from Maury industries. The appropriate rate of interest for this type of note is 8%. At the time the note is signed, what is the present value of the note on Carter's records?
150000/(1.08)^5= 102,087
Jingle Company signs a 6-month, $20,000 note. Stated annual interest rate is 8% payable at the maturity date. Interest incurred on the note is calculated as
20,000*8%*(6/12)= $800
Able Inc. sells a new product with a 2-year warranty. The company estimates that during the two years, the costs and related probabilities are: Year 1: $10,000 (20%) and $20,000 (80%); Year 2: $15,000 (50%); $25,000 (50%).The company's effective interest rate is 4%. Assuming the warranty costs are settled at the end of Years 1 and 2, calculate the estimated warranty liability using the expected cash flow method.
35797
Morgan Co. signs a $50,000 noninterest-bearing 5-year note payable for goods purchased from Xelco Industries. The appropriate rate of interest for this type of note is 10%. At the time the note is signed, what is the present value of the note on Morgan's records?
50,000/(1+10%)^5= $31,046
Munchen Company prepays $89,000 for inventory to be delivered in two years. The applicable effective interest rate is 6%. Upon delivery, Muchen should recognize the purchase of inventory at:
89000*(1.06)^2=100,000
January 15, 2018, Munter Company learned of a judgment against the company in a lawsuit brought by a client relating to services provided by Munter during the 2017 fiscal period. The 2017 financial statements have not yet been issued. Munter should
Accrue an estimated liability if a loss is probable and estimable
Earnings-per-share, net income, and operating income are commonly used financial performance indicators used to determine:
Annual bonuses
Best Equipment Inc. sells its products with a 3-year limited warranty. During 2017, Best Equipment recognizes $550,000 in sales revenue. Based on past experience, some of its products will need repair during the warranty period. What is the appropriate accounting treatment for Best Equipment's product warranty?
Best should estimate the contingent liability and accrue it in 2017
Roberts Corp. sells its products with a 2-year warranty. Estimated total warranty cost relating to sales for the year ended December 31, 2017, is $210,000. One-third of these estimated costs are expected to be incurred during 2018 with two-thirds expected to be incurred during 2019. Indicate the amount and classification of the estimated warranty cost on the balance sheet at 12/31/2017.
Current liability- $70,000 Long Term liability- $140,000
Larry signs a note payable for $40,000. The principal of the note and interest are due in 2 years, and the note bears interest at 12% compounded annually. What is the total interest that must be repaid at the end of year 2?
Date-Interest-Balance Initial- -$40,000 End Yr 1-12%*40,000=4800-$44800 End Yr 2-12%*44800=5376-$50176 Total Interest= $50176-$40000=$10176
On January 1, Western Corp. borrows $100,000 from FirstBank using a six-month, 10% promissory note. Interest and principal are payable at maturity. The journal entry on June 30 includes (Select all that apply.)
Debit Notes Payable-100,000 Debit Interest Expense-5000 Credit Cash- 105000
Choose the correct formula for calculating interest.
Face amount x annual interest rate x fraction of the year
Clara invests $1,000 in a savings account earning 3% interest. At the end of the first uear, Clara has $1,030 in the account. The $1,030 Clara has at the end of year 1 is the _____ value
Future
Both U.S. GAAP and IFRS require accrual of a measurable probable contingent loss, but only ____ defines probable as 'more likely than not.'
IFRS
On December 1, 2017, Katie Corp. borrows $100,000 from its bank and signs a 6-month, 12% promissory note. What accounts should be debited when the interest is paid on the maturity date and what are the amounts? Assume that no interest accruals were made during 2018 relating to this note. (Select all that apply.)
Interest Payable:1000 Interest Expense: 5000
Munchen Company prepays $89000 for inventory to be delivered in two years. The applicable interest rate is 6%. One year after the prepayment, Munchen should recognize:
Interest Revenue of (89,000*6%)= 5340
Choose the statement that best reflects the nature of interest.
Interest is the "rent" paid by the borrower for using the lender's money.
Which represents the formal credit instrument for a trade notes payable?
Promissory note
On December 1, 2017, Kathryn Corp. borrows $100,000 from its bank and signs a 6-month, 12% promissory note. Interest is payable when the loan matures. What entry should Kathryn make on December 31 relating to its note?
Recognize interest expense and interest payable of $1,000.
Which represents the formal credit instrument for an accounts payable?
Supplier's invoice
Which of the following is a requirement for recognizing employee compensation for future absences?
The amt of payment can be reasonably estimated
The difference between the present value of an investment and its future value represents the ____ _____ of money
Time value
Obligations to suppliers of merchandise that bear interest and are for a longer term than open accounts are called:
Trade notes payable
Match the appropriate measurement of a probable contingent loss for which a best estimate is not available with the correct accounting standard.
U.S. GAAP- the low end of a range of equally likely outcomes IFRS- the midpoint of a range of equally likely outcomes
Identify the most common loss contingency that does not result in the recognition of a liability.
Uncollectible receivables
Tortoise Corp. would like to know how much $1,000 invested today will grow to in four years. Assume the interest on the investment is compounded annually at 10%. What is the future value of this investment in four years?
Using FV of $1 n=4 i=10% FV factor= 1.4641 PV=1000 FV=1464.1
On January 1, year 1, Dennis borrows $20,000 at 6% interest compounded semi-annually. What is the amount of interest dennis will pay at the end of year 4? Round your answer to the nearest dollar.
[$20,000*(1+3%)^8]-$20,000=$5,335
Sperry Corp signs a 2-year note payable for $100,000. The principal of the note and interest are due in 2 years, and the note bears interest at 10% compounded annually. What is the amount of interest that must be repaid at the end of year 2?
[100,000*(1.1)^2]-100,000= 121,000 121,000-100,000= $21,000
On January 1, year 1, Mary borrows $30,000 at 8% interest compounded semi-annually. What is the amount of interest Mary will pay at the end of year 3?
[30000*(1.04)^6]-30000= $7,960
Walden Company collects the annual fee for 100 magazine renewals. The annual price is $104 per subscription and covers 52 weekly magazines. When Walden Company receives payment for each subscription renewal, the company should recognize
a liability for $104
If a company judges the likelihood that an unasserted claim will be asserted at a future date, it is probable the outcome will be unfavorable, and the related amount can be estimated, the company should
accrue a contingent liability
Gift certificates, magazine subscriptions, layaway deposits, special order deposits, and airline tickets all are examples of
advances from customers
Schmidt Company borrows $10000 from its bank and signs a 6 month note. Interest, whichh is due quarterly, is specified in the note as 6%. The interest rate stated in the loan agreement likely applies to
an entire year
Consistent with SFAC No. 7, long-term contingent liabilities should be measured using
an expected cash flow approach
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
Greene Company experienced a warehouse fire on January 28, 2018. The company estimates that the uninsured portion of its loss will be approximately $10,000. If the company's 2017 financial statements have not yet been issued, Greene should
disclose the estimated loss in its 2017 financial statements
Material events giving rise to a contingency that occur after the end of the fiscal period but before the financial statements are issuedc
must be disclosed in a subsequent events disclosure note
Revenue related to extended warranty contracts typically is recognized
overtime
Unearned revenue represents a liability until the
related product or service is provided
Walden Company collects the annual fee for 100 magazine renewals. The annual price is $104 per subscription and covers 52 weekly magazines. The subscription period is from July 1 till June 30 of the following year. During the current calendar year for each subscription, Walden should recognize
revenue of $52
Classifying liabilities as current or non-current depends on when the contingent liability is expected to be
satisfied
In situations when the compounding period is less than a year, the interest rate per compounding period is determined by dividing the annual rate by what?
the number of periods
Revenue related to extended warranty contracts typically is recognized over time because
the warranty provides coverage over time
The most common way for corporations to obtain temporary fincancing is:
through short-term bank loans
