Chapter 13 Current Liabilities And Contingencies Test Bank

Intermediate Accounting, 10e (Spiceland)

Chapter 13 Current Liabilities and Contingencies

1) Some liabilities are not contractual obligations and may not be payable in cash.

Difficulty: 1 Easy

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

2) A line of credit is an agreement to provide long-term financing, typically made with a bank or a group of banks.

Difficulty: 1 Easy

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

3) Amounts withheld from employees in connection with payroll often represent liabilities to be remitted to third parties.

Difficulty: 1 Easy

Topic: Advance collections-For third parties; Payroll-related liabilities—Appendix

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.; Appendix 13 Payroll-Related Liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

4) A customer advance produces a liability that is satisfied when the product or service is provided.

Difficulty: 1 Easy

Topic: Advance collections-Deferred revenue

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

5) Revenue is recognized upon sale of gift cards, rather than being deferred.

Difficulty: 1 Easy

Topic: Advance collections-Gift cards

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

6) Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called.

Difficulty: 1 Easy

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

7) The concept of substance over form influences the classification of obligations expected to be refinanced.

Difficulty: 1 Easy

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

8) Under IFRS, a liability that is refinanced after the balance sheet date but before the financial statements are issued would typically be classified as a current liability.

Difficulty: 1 Easy

Topic: Product warranties and guarantees

Learning Objective: 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

9) Expense for a quality-assurance warranty is recorded along with the related liability in the reporting period in which the product under warranty is sold.

Difficulty: 1 Easy

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

10) For a loss contingency to be accrued, the claim must have been made before the accounting period ended.

Difficulty: 2 Medium

Topic: Unasserted claims and assessments

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

11) A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated.

Difficulty: 1 Easy

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

12) A disclosure note is required for all material loss contingencies for which the probability of loss is reasonably possible.

Difficulty: 1 Easy

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

13) A liability for an unasserted claim must be accrued if it is reasonably possible that the claim will be asserted.

Difficulty: 1 Easy

Topic: Unasserted claims and assessments

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

14) An asset for a gain contingency should not be accrued unless it is probable that the gain contingency will be realized.

Difficulty: 1 Easy

Topic: Gain contingencies

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

15) Under IFRS, the term "probable" indicates a threshold of probability that is substantially more than a 50 percent chance of occurrence.

Difficulty: 2 Medium

Topic: IFRS‒Contingencies

Learning Objective: 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

16) Under IFRS, if it is probable that a contingent liability will result in a future payment but there is a range of equally likely amounts that will be paid, the midpoint of the range should be accrued as a loss.

Difficulty: 1 Easy

Topic: IFRS‒Contingencies

Learning Objective: 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Remember

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

17) The cost of promotional offers should always be recorded as expenses in the accounting period when the offers are redeemed by customers.

Difficulty: 2 Medium

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

18) Unlike the Social Security tax there is no maximum wage base for the Medicare portion of the FICA tax.

Difficulty: 1 Easy

Topic: Payroll-related liabilities‒Appendix

Learning Objective: Appendix 13 Payroll-Related Liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

19) State and Federal Unemployment Taxes (SUTA and FUTA) must be withheld from employees' salaries.

Difficulty: 1 Easy

Topic: Payroll-related liabilities‒Appendix

Learning Objective: Appendix 13 Payroll-Related Liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

20) The most common type of liability is:

A) One that comes into existence due to a loss contingency.

B) One that must be estimated.

C) One that comes into existence due to a gain contingency.

D) One to be paid in cash and for which the amount and timing are known.

Difficulty: 1 Easy

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

21) Which of the following is not a characteristic of a liability?

A) It represents a probable, future sacrifice of economic benefits.

B) It must be payable in cash.

C) It arises from present obligations to other entities.

D) It results from past transactions or events.

Difficulty: 1 Easy

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

22) Which of the following is the best definition of a current liability?

A) An obligation payable within one year.

B) An obligation payable within one year of the balance sheet date.

C) An obligation payable within one year or within the normal operating cycle, whichever is longer.

D) An obligation expected to be satisfied with current assets or by the creation of other current liabilities.

Difficulty: 1 Easy

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

23) Which of the following is not a liability?

A) An unused line of credit.

B) Estimated income taxes.

C) Sales tax collected from customers.

D) Advances from customers.

Difficulty: 1 Easy

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

24) Current liabilities normally are recorded at their:

A) Present value.

B) Cost.

C) Maturity amount.

D) Expected value.

Difficulty: 1 Easy

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

25) Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of:

A) Matching.

B) Consistency.

C) Materiality.

D) Conservatism.

Difficulty: 2 Medium

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

26) The key accounting considerations relating to accounts payable are:

A) Determining their existence and ensuring that they are recorded in the appropriate accounting period.

B) Determining their present value and ensuring that they are recorded in the appropriate accounting period.

C) Determining their existence and determining the correct amount.

D) Determining the present value of the principal and the amount of the interest.

Difficulty: 2 Medium

Topic: Accounts payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

27) Classifying liabilities as either current or long-term helps creditors assess:

A) Profitability.

B) The relative risk of a firm's liabilities.

C) The degree of a firm's liabilities.

D) The amount of a firm's liabilities.

Difficulty: 2 Medium

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

28) When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in:

A) A current liability.

B) Revenue.

C) Shareholders' equity.

D) Paid-in capital.

Difficulty: 2 Medium

Topic: Advance collections-Refundable deposits

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

29) A discount on a noninterest-bearing note payable is classified in the balance sheet as:

A) An asset.

B) A component of shareholders' equity.

C) A contingent liability.

D) A contra liability.

Difficulty: 1 Easy

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

30) The rate of interest printed on the face of a note payable is called the:

A) Yield rate.

B) Effective rate.

C) Market rate.

D) Stated rate.

Difficulty: 1 Easy

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

31) The rate of interest that actually is incurred on a note payable is called the:

A) Face rate.

B) Contract rate.

C) Effective rate.

D) Stated rate.

Difficulty: 1 Easy

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

32) On October 31, 2021, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. The stated discount rate is 8%. Simeon's effective interest rate on this loan is:

A) More than the stated discount rate of 8%.

B) Less than the stated discount rate of 8%.

C) Equal to the stated discount rate of 8%.

D) Unrelated to the stated discount rate of 8%.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

33) On April 31, 2021, Elkhorn Associates borrowed $10 million cash from Colonial Bank and issued a 5-month, noninterest-bearing note, priced to yield an effective interest rate of 10%. The stated discount rate on this loan is:

A) More than the effective interest rate.

B) Less than the effective interest rate.

C) Equal to the effective interest rate.

D) Unrelated to the effective interest rate.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

34) Large, highly rated firms sometimes sell commercial paper:

A) To borrow funds at a lower rate than through a bank.

B) To earn a profit on the paper.

C) To avoid paperwork.

D) Because the interest rate is locked in by the Federal Reserve Board.

Difficulty: 1 Easy

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: / Keyboard Navigation

35) Jane's Donut Co. borrowed $200,000 on January 1, 2021, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2023. In connection with this note, Jane's should report interest expense at December 31, 2021, in the amount of:

A) $0.

B) $24,000.

C) $48,000.

D) $50,880.

Difficulty: 1 Easy

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

36) What is the effective interest rate (rounded) on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000? (Do not round intermediate calculations. Round final answer to 1 decimal place.)

A) 12.4%.

B) 13.6%.

C) 11.5%.

D) 3.1%.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

37) On September 1, 2021, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank where the stated discount rate is 9%. Hiker's effective interest rate on this loan (rounded) is: (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

A) 9.0%.

B) 9.5%.

C) 9.6%.

D) 9.7%.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

38) Universal Travel Inc. borrowed $500,000 on November 1, 2021, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2022. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2021, in the amount of: (Round your final answers to the nearest whole dollar.)

A) $8,000.

B) $30,000.

C) $5,000.

D) $25,000.

Difficulty: 2 Medium

Topic: Accrued interest payable

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

39) Oklahoma Oil Corp. paid interest of $785,000 during 2021, and the interest payable account decreased by $125,000. What was interest expense for the year?

A) $910,000.

B) $660,000.

C) $555,000.

D) $785,000.

Difficulty: 2 Medium

Topic: Accrued interest payable

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

40) On June 1, 2021, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. Assuming straight-line amortization of the discount, what is the carrying value of the note as of September 30, 2021? (Round all calculations to the nearest whole dollar amount.)

A) $525,000.

B) $300,000.

C) $495,000.

D) $475,000.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

41) At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:

A) Liabilities until the product or service is provided.

B) A component of shareholders' equity.

C) Long-term assets until the product or service is provided.

D) Revenue upon receipt of the advance payment.

Difficulty: 1 Easy

Topic: Advance collections-Deferred revenue

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

42) Which of the following is not true about deferred revenue?

A) Deferred revenue with respect to gift cards is recognized as revenue when the gift cards expire.

B) Deferred revenue is a liability.

C) Deferred revenue is recognized on credit sales when collectibility can be estimated.

D) Customer prepayments typically require recognition of deferred revenue.

Difficulty: 1 Easy

Topic: Advance collections-Deferred revenue

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

43) M Corp. has an employee benefit plan for compensated absences that gives each employee 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2021, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 total vacation days available at December 31, 2021. M's employees earn an average of $150 per day. In its December 31, 2021, balance sheet, what amount of liability for compensated absences is M required to report?

A) $0.

B) $30,000.

C) $225,000.

D) $450,000.

Difficulty: 1 Easy

Topic: Accrued employee compensation

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

44) Which of the following generally is associated with accounts payable?

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 1 Easy

Topic: Accounts payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

45) Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2021 is as follows ($ in millions):

What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2021, balance sheet?

A) $0.

B) $80 million.

C) $125 million.

D) $170 million.

Difficulty: 2 Medium

Topic: Advance collections-Deferred revenue

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

46) All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party?

A) Sales tax payable.

B) Customer deposits.

C) Employee insurance deductions.

D) Social security taxes deductions.

Difficulty: 2 Medium

Topic: Advance collections-For third parties; Payroll-related liabilities—Appendix

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.; Appendix 13 Payroll-Related Liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

47) When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:

A) A decrease in cost of goods sold.

B) An increase in current liabilities.

C) An increase in accounts receivable.

D) An increase in revenue.

Difficulty: 3 Hard

Topic: Advance collections-Refundable deposits

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

48) B Corp. has an employee benefit plan for compensated absences that gives each employee 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2021, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 total vacation days and 150 sick days available at December 31, 2021. B's employees earn an average of $200 per day. In its December 31, 2021, balance sheet, what amount of liability for compensated absences is B required to report?

A) $60,000.

B) $84,000.

C) $90,000.

D) $144,000.

Difficulty: 3 Hard

Topic: Accrued employee compensation

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

49) On January 1, 2021, G Corporation agreed to grant all its employees two weeks paid vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2021, G's employees each earned an average of $800 per week. A total of 500 vacation weeks earned in 2021 were not taken during 2021. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2022. What is the amount of G's 2022 salaries expense related to 2021 vacation time?

A) $0.

B) $20,000.

C) $400,000.

D) $420,000.

Difficulty: 3 Hard

Topic: Accrued employee compensation

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

50) Revenue for gift card breakage should be recognized:

A) When the gift card is sold.

B) No later than the last day of the operating period in which the gift card is delivered to the customer.

C) When the probability of gift card redemption is viewed as remote.

D) Under no circumstances, as gift cards are not themselves a delivered product, but rather a selling technique.

Difficulty: 2 Medium

Topic: Advance collections-Gift cards

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

51) All else equal, a large increase in deferred revenue in the current period would be expected to produce what effect on revenue in a future period?

A) Large increase, because deferred revenue becomes revenue when the seller has satisfied its performance obligations.

B) Large decrease, because deferred revenue implies that less revenue has been earned, which reduces future revenue.

C) No effect, because deferred revenue is a liability, so payment will use assets rather than providing revenue.

D) Large decrease, because deferred revenue indicates collection problems that will reduce net revenues in future periods.

Difficulty: 2 Medium

Topic: Advance collections-Deferred revenue

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Evaluate

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

52) Peterson Photoshop sold $1,000 in gift cards on a special promotion on October 15, 2021, and sold $1,500 in gift cards on another special promotion on November 15, 2021. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the gift cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2021, Peterson would show a deferred revenue account for the gift cards with a balance of:

A) $0.

B) $1,000.

C) $1,350.

D) $1,500.

Difficulty: 3 Hard

Topic: Advance collections-Gift cards

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

53) When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes:

A) A debit to a revenue and a credit to a liability account.

B) A debit to a revenue and a credit to an asset account.

C) A debit to an asset and a credit to a revenue account.

D) A debit to a liability and a credit to a revenue account.

Difficulty: 2 Medium

Topic: Advance collections-Deferred revenue

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

54) Clark's Chemical Company received refundable deposits on returnable containers in the amount of $100,000 during 2021. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?

A) $0.

B) $2,000.

C) $10,000.

D) $14,400.

Difficulty: 3 Hard

Topic: Advance collections-Refundable deposits

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

55) In May of 2021, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2021, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2021 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2021, balance sheet of:

A) $770,000.

B) $900,000.

C) $970,000.

D) $1,170,000.

Difficulty: 3 Hard

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

56) Slotnick Chemical received $300,000 from customers as deposits on returnable containers during 2021. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits?

A) $0.

B) $7,500.

C) $9,000.

D) $45,000.

Difficulty: 3 Hard

Topic: Advance collections-Refundable deposits

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

57) Which of the following is not a current liability?

A) Accounts payable.

B) A note payable due in two years.

C) Accrued interest payable.

D) Sales tax payable.

Difficulty: 1 Easy

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

58) Short-term obligations can be reported as long-term liabilities if:

A) The firm has a long-term line of credit.

B) The firm has tentative plans to issue long-term bonds.

C) The firm intends to and has the ability to refinance as long-term.

D) The firm has the ability to refinance on a long-term basis.

Difficulty: 1 Easy

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

59) Of the following, which typically would not be classified as a current liability?

A) Estimated liability from cash rebate program.

B) A long-term note payable maturing within the coming year.

C) Rent revenue received in advance.

D) A six-month bank loan to be paid with the proceeds from the sale of common stock.

Difficulty: 1 Easy

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

60) Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?

A) The long-term debt is callable by the creditor.

B) The creditor has the right to demand payment due to a contractual violation.

C) The long-term debt matures within the upcoming year.

D) The company intended to refinance the debt and did so prior to issuance of the financial statements.

Difficulty: 2 Medium

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

61) A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt:

A) Is callable by the creditor.

B) Is secured by adequate collateral.

C) Will be refinanced with stock.

D) Will be refinanced with debt.

Difficulty: 2 Medium

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

62) On December 31, 2021, L Inc. had a $1,500,000 note payable outstanding, due July 31, 2022. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2022. In February 2022, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2022. On March 13, 2022, L issued its 2021 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2021, balance sheet?

A) $0.

B) $500,000.

C) $1,000,000.

D) $1,500,000.

Difficulty: 2 Medium

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

63) Liabilities payable within the coming year are classified as long-term liabilities if refinancing is completed before date of issuance of the financial statements under:

A) U.S. GAAP.

B) IFRS.

C) Either U.S. GAAP or IFRS.

D) Neither U.S. GAAP nor IFRS.

Difficulty: 2 Medium

Topic: IFRS‒Liabilities to be refinanced

Learning Objective: 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Understand

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

64) Kline Company refinanced current debt as long-term debt on January 5, 2022. Kline's fiscal year ended on December 31, 2021, and its financial statements will be issued sometime in early March 2022. Under IFRS, how would Kline classify the debt on its December 31, 2021, balance sheet?

A) In the "mezzanine" between current and noncurrent liabilities.

B) Kline would not classify the debt as current or noncurrent, but rather would write a disclosure note explaining the circumstances.

C) As a noncurrent liability.

D) As a current liability.

Difficulty: 2 Medium

Topic: IFRS‒Liabilities to be refinanced

Learning Objective: 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Understand

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

65) Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2022. At December 31, 2021, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2021, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2021, balance sheet, Branch should classify the notes as follows:

A) $15,000,000 long-term and $3,000,000 current liabilities.

B) $4,500,000 short-term and $13,500,000 current liabilities.

C) $18,000,000 of current liabilities.

D) $18,000,000 of long-term liabilities.

Difficulty: 2 Medium

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

66) Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report:

A) Higher working capital and a higher inventory turnover.

B) Lower working capital and a higher current ratio.

C) Higher working capital and a higher current ratio.

D) Higher working capital and a lower debt to equity ratio.

Difficulty: 2 Medium

Topic: Decision-makers' perspective

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Evaluate

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

67) Financial statement note disclosure is required for material potential losses when the loss is at least reasonably possible:

A) Only if the amount is known.

B) Only if the amount is known or reasonably estimable.

C) Unless the amount is not reasonably estimable.

D) Even if the amount is not reasonably estimable.

Difficulty: 1 Easy

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

68) Gain contingencies usually are recognized in a company's income statement when:

A) Realized.

B) The amount can be reasonably estimated.

C) The gain is reasonably possible and the amount can be reasonable estimated.

D) The gain is probable and the amount can be reasonably estimated.

Difficulty: 1 Easy

Topic: Gain contingencies

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

69) Gray Co. estimates it is probable that it will receive a $10,000 gain contingency and pay a $4,000 loss contingency. After recording the appropriate journal entries to recognize contingent amounts, Gray Co.'s net assets will:

A) Increase by $10,000.

B) Increase by $6,000.

C) Decrease by $4,000.

D) Not change.

Difficulty: 2 Medium

Topic: Gain contingencies

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

70) A company should accrue a loss contingency only if the likelihood that a liability has been incurred is:

A) More likely than not and the amount of the loss is known.

B) At least reasonably possible and the amount of the loss is known.

C) At least reasonably possible and the amount of the loss can be reasonably estimated.

D) Probable and the amount of the loss can be reasonably estimated.

Difficulty: 1 Easy

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

71) A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is:

A) At least remotely possible and the amount of the loss is known.

B) Reasonably possible and the amount of the loss is known.

C) Reasonably possible and the amount of the loss can be reasonably estimated.

D) Probable and the amount of the loss can be reasonably estimated.

Difficulty: 1 Easy

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

72) A contingent loss should be reported in a disclosure note to the financial statements rather than being accrued if:

A) The likelihood of a loss is remote.

B) The incurrence of a loss is reasonably possible.

C) The incurrence of a loss is more likely than not.

D) The likelihood of a loss is probable.

Difficulty: 1 Easy

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

73) Which of the following is a contingency that should be accrued?

A) The company is being sued and a loss is reasonably possible and reasonably estimable.

B) The company deducts life insurance premiums from employees' paychecks.

C) The company offers a two-year warranty and the expenses can be reasonably estimated.

D) It is probable that the company will receive $100,000 in settlement of a lawsuit.

Difficulty: 2 Medium

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

74) Paul Company issues a product recall due to an apparently preexisting and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is:

A) To disclose it in a note to the financial statements.

B) To accrue a long-term liability.

C) To accrue the liability and explain it in a note to the financial statements.

D) To do nothing relative to the contingency.

Difficulty: 2 Medium

Topic: Subsequent events

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

75) After the end of the 2021 fiscal year but before financial statements were issued, EPK Company learned that an arbitrator had made a $10 million judgment in a litigation judgment against it. The claim had been made in 2020 for alleged defects of products sold in 2019. Prior to learning of the judgment, EPK had not accrued any litigation loss, and does not plan to appeal. For the 2021 fiscal year, EPK should:

A) Disclose the potential for a judgment in the notes, but not indicate the amount, since the judgment was made after fiscal year end.

B) Disclose in the notes that a $10 million judgment was made after fiscal year end.

C) Accrue a $10 million liability and explain it in a note to the financial statements.

D) Do nothing relative to the contingency.

Difficulty: 2 Medium

Topic: Subsequent events

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: / Keyboard Navigation

76) After the end of the 2021 fiscal year but before financial statements were issued, an accident occurred at KPN's manufacturing facility that probably will result in material losses to KPN. KPN has relatively precise estimates of those losses. KPN should:

A) Disclose the potential for loss in the notes, but not indicate their estimate of an amount.

B) Disclose the potential losses and their effect on key numbers in the financial statements.

C) Accrue the loss, since it is probable and can be reasonably estimated, and explain it in a note to the financial statements.

D) Do nothing relative to the contingency.

Difficulty: 2 Medium

Topic: Subsequent events

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: / Keyboard Navigation

77) Accounting for incentive programs for customer purchases:

A) Requires probability estimation.

B) Follows the revenue recognition process.

C) Will most likely initially recognize a liability or deferred revenue.

D) All of these answer choices are correct.

Difficulty: 1 Easy

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

78) Providing a monetary rebate program for purchasing a product:

A) Is accounted for similarly to refundable deposits.

B) Creates an expense for the seller in the period of sale.

C) Creates a contingent liability for the seller at the time of sale.

D) All these answer choices are correct.

Difficulty: 2 Medium

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

79) An extended warranty typically results in the seller:

A) Accruing an expense for anticipated warranty costs at the time the warranty is sold.

B) Estimating the contingent liability associated with the warranty at the time the warranty is sold.

C) Recognizing revenue over the life of the extended warranty.

D) Refunding warranty payments upon expiration of the warranty.

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

80) A quality-assurance warranty typically results in the seller:

A) Accruing an expense for anticipated warranty costs at the time the warrantied product is sold.

B) Recognizing an asset for accrued warranty costs which is amortized over the life of the warranty.

C) Recognizing revenue over the life of the extended warranty.

D) Refunding warranty payments upon expiration of the warranty.

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

81) Which of the following is true about the initial journal entry used to record quality-assurance warranties?

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

82) Which of the following is true about the initial journal entry used to record extended warranties?

A) Option A

B) Option B

C) Option C

D) Option D

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

83) Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, a loss contingency should be:

A) Disclosed but not accrued as a liability.

B) Disclosed and accrued as a liability.

C) Accrued as liability but not disclosed.

D) Neither accrued as a liability nor disclosed.

Difficulty: 1 Easy

Topic: Unasserted claims and assessments

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

84) Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is reasonably possible, a loss contingency should be:

A) Disclosed but not accrued as a liability.

B) Disclosed and accrued as a liability.

C) Accrued as liability but not disclosed.

D) Neither accrued as a liability nor disclosed.

Difficulty: 1 Easy

Topic: Unasserted claims and assessments

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

85) Red Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is probable, a loss contingency should be:

A) Disclosed but not accrued as a liability.

B) Disclosed and accrued as a liability.

C) Accrued as liability but not disclosed.

D) Neither accrued as a liability nor disclosed.

Difficulty: 1 Easy

Topic: Unasserted claims and assessments

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

86) Z Co. filed suit against W Inc. in 2021 seeking damages for patent infringement. At December 31, 2021, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2022. Z should report this award in its 2021 financial statements, issued in March 2022 as:

A) A receivable and deferred revenue of $40 million.

B) A receivable and revenue of $40 million.

C) A disclosure of a gain contingency of $40 million.

D) A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.

Difficulty: 2 Medium

Topic: Gain contingencies

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

87) When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be:

A) Reported in the income statement and disclosed.

B) Offset against shareholders' equity.

C) Disclosed but not recognized in the income statement.

D) Neither recognized in the income statement nor disclosed.

Difficulty: 1 Easy

Topic: Gain contingencies

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

88) Which of the following would most likely require initial recording as deferred revenue?

A) Potential claims on extended warranties.

B) Customer premium offers.

C) Potential liability on a product where none have yet been sold.

D) Sales tax payable.

Difficulty: 2 Medium

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

89) A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under U.S. GAAP, RoughEdge should accrue a liability in the amount of:

A) $0.

B) $1,000,000.

C) $2,000,000.

D) $3,000,000.

Difficulty: 3 Hard

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

90) A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer. Razor believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under IFRS, Razor should accrue a liability in the amount of:

A) $0.

B) $1,000,000.

C) $2,000,000.

D) $3,000,000.

Difficulty: 2 Medium

Topic: IFRS‒Contingencies

Learning Objective: 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Apply

AACSB: Diversity

AICPA/Accessibility: FN Measurement / Keyboard Navigation

91) Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

A) When the equipment is sold.

B) When the repairs are performed.

C) When payments are made to the service firm.

D) Evenly over the life of the warranty.

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

92) As part of a promotion campaign, Funzy Cereal includes one coupon in each issue of various national magazines and offers a toy car in exchange for $1.00 and three coupons. The cars cost Funzy $1.50 each. Experience indicates that 4% of the coupons eventually will be redeemed. During the last month of 2021, the first month of the offer, 12 million coupons were distributed and 240,000 million of the coupons were redeemed. Funzy recognizes coupon promotion expense in the period coupons are issued. What amount should Funzy report as coupon promotion expense on its December 31, 2021, income statement?

A) $0.

B) $40,000.

C) $80,000.

D) $120,000.

Difficulty: 3 Hard

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

93) At the beginning of 2021, Angel Corporation began offering a two-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2021 were $180 million. Fifteen percent of the units sold were returned in 2021 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2021 income statement is:

A) $5.3 million.

B) $7.2 million.

C) $10.6 million.

D) $27.0 million.

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

94) During 2021, Deluxe Leather Goods issued 800,000 coupons which entitles the customer to a $5.00 cash refund when the coupon is submitted at the time of any future purchase. Deluxe estimates that 70% of the coupons will be redeemed. 350,000 coupons had been processed during 2021. Deluxe recognizes coupon expense in the period coupons are issued. At December 31, 2021, Deluxe should report a liability for unredeemed coupons of:

A) $560,000.

B) $1,050,000.

C) $1,225,000.

D) $1,750,000.

Difficulty: 3 Hard

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

95) In 2021, Holyoak Inc. offers a coupon for $20 off qualifying purchases of its new line of products. Holyoak sold 10,000 of these products during the year. By year-end of 2021, 7,100 coupons had been redeemed and the $20 reduction of purchase price provided to customers. Holyoak's historical experience with such coupons indicates that 85% of customers use the coupon. Holyoak recognizes coupon expense in the period coupons are issued.

What is the expense that Holyoak should report for its promotional coupons in its 2021 income statement?

A) $142,000.

B) $152,000.

C) $170,000.

D) $200,000.

Difficulty: 2 Medium

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

96) In 2021, Holyoak Inc. offers a coupon for $20 off qualifying purchases of its new line of products. Holyoak sold 10,000 of these products during the year. By year-end of 2021, 7,100 coupons had been redeemed and the $20 reduction of purchase price provided to customers. Holyoak's historical experience with such coupons indicates that 85% of customers use the coupon. Holyoak recognizes coupon expense in the period coupons are issued.

What is the coupon promotion liability that Holyoak should report in its December 31, 2021, balance sheet?

A) $20,000.

B) $28,000.

C) $18,000.

D) $19,000.

Difficulty: 3 Hard

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

97) In the current year, Hanna Company reported quality-assurance warranty expense of $190,000 and the warranty liability account increased by $20,000. What amount of warranty costs were paid during the year?

A) $190,000.

B) $170,000.

C) $210,000.

D) $0.

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

98) Panther Co. had a quality-assurance warranty liability of $350,000 at the beginning of 2021 and $310,000 at the end of 2021. Warranty expense is based on 4% of sales, which were $50 million for the year. What amount of warranty costs were paid during 2021?

A) $0.

B) $1,960,000.

C) $2,000,000.

D) $2,040,000.

Difficulty: 1 Easy

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

99) Carpenter Inc. had a balance of $80,000 in its quality-assurance warranty liability account as of December 31, 2020. In 2021, Carpenter's warranty expenditures paid were $445,000. Its warranty expense is calculated as 1% of sales. Sales in 2021 were $40 million. What was the balance in the warranty liability account as of December 31, 2021?

A) $35,000.

B) $425,000.

C) $125,000.

D) $480,000.

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

100) General Product Inc. distributed 100 million coupons in 2021. The coupons are redeemable for 30 cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2022. There were 45 million coupons redeemed in 2021 and 30 million redeemed in 2022. General recognizes coupon promotion expense in the period coupons are issued.

What was General's coupon promotion expense in 2021?

A) $30.0 million.

B) $21.0 million.

C) $13.5 million.

D) $7.5 million.

Difficulty: 2 Medium

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

101) General Product Inc. distributed 100 million coupons in 2021. The coupons are redeemable for 30 cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2022. There were 45 million coupons redeemed in 2021 and 30 million redeemed in 2022. General recognizes coupon expense in the period coupons are issued.

What was General's coupon liability as of December 31, 2021?

A) $7.5 million.

B) $13.5 million.

C) $16.5 million.

D) $21.0 million.

Difficulty: 3 Hard

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

102) General Product Inc. distributed 100 million coupons in 2021. The coupons are redeemable for 30 cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2022. There were 45 million coupons redeemed in 2021 and 30 million redeemed in 2022. General recognizes coupon expense in the period coupons are issued.

What was General's coupon promotional expense in 2022?

A) Zero, since the entire coupon expense was recognized in 2021.

B) $1.5 million.

C) $7.5 million.

D) $9.0 million.

Difficulty: 2 Medium

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

103) During the year, L&M Leather Goods sold 1,000,000 reversible belts under a new sales promotional program. Each belt carried one rebate certificate which entitles the customer to a $4.00 cash refund when the rebate is submitted for redemption. L&M estimates that 70% of the rebates will be redeemed. 500,000 rebates had been submitted for redemption during the year. At December 31, L&M should report a liability for unredeemed rebate certificates of:

A) $700,000.

B) $800,000.

C) $1,000,000.

D) $2,800,000.

Difficulty: 2 Medium

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

104) Which of the following may create employer liabilities in connection with their payrolls?

A) Employee withholding taxes.

B) Employee voluntary deductions.

C) Employee fringe benefits.

D) All of these answer choices are correct.

Difficulty: 2 Medium

Topic: Payroll-related liabilities‒Appendix

Learning Objective: Appendix 13 Payroll-Related Liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement / Keyboard Navigation

105) Barbara Muller Services (BMS) pays its employees monthly. The payroll information listed below is for January 2021, the first month of BMS's fiscal year. Assume none of the employees' earnings reached $7,000 during the month.

The journal entry to record payroll for the January 2021 pay period will include a debit to payroll tax expense of:

A) $6,120.

B) $4,960.

C) $11,080.

D) $57,880.

Difficulty: 3 Hard

Topic: Payroll-related liabilities‒Appendix

Learning Objective: Appendix 13 Payroll-Related Liabilities.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement / Keyboard Navigation

106) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 2 Medium

Topic: Credit line―Commercial paper―Notes; Product warranties and guarantees; Advance collections — Deferred revenue; Loss contingencies

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.; 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement; BB Legal

107) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 2 Medium

Topic: Credit line-Commercial paper-Notes; Accrued interest payable; Accrued employee compensation; Advance collections-For third parties; Current and noncurrent classification

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.; 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal; FN Measurement

108) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 2 Medium

Topic: Credit line―Commercial paper―Notes; Advance collections — Deferred revenue; Accrued interest payable; Loss contingencies; Gain contingencies

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.; 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal; FN Measurement

109) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 2 Medium

Topic: Characteristics of liabilities; Credit line―Commercial paper―Notes; Subsequent events; Unasserted claims and assessments

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.; 13-04 Determine when a liability can be classified as a noncurrent obligation.; 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal; FN Measurement

110) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.

Difficulty: 2 Medium

Topic: Credit line-Commercial paper-Notes; Accounts payable; Loss contingencies

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal; FN Measurement

111) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

Difficulty: 2 Medium

Topic: Characteristics of liabilities; Credit line―Commercial paper―Notes; Current and noncurrent classification; Loss contingencies

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.; 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-04 Determine when a liability can be classified as a noncurrent obligation.; 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: BB Legal; FN Measurement

112) Indicate (by number) the way each of the items listed below should be reported in a balance sheet at December 31, 2021. Match each phrase with the number for the correct term.

Difficulty: 2 Medium

Topic: Loss contingencies; Unasserted claims and assessments; Gain contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

113) Listed below are five terms followed by a list of phrases that describe or characterize five of the terms related to accounting for contingent liabilities under IFRS. Match each phrase with the number for the most correct term.

Difficulty: 2 Medium

Topic: IFRS‒Contingencies

Learning Objective: 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Understand

AACSB: Reflective Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement

114) Indicate (by number) the way each of the items listed below should be reported in a balance sheet at December 31, 2021. Match each phrase with the number of the term for the accounting treatment.

Difficulty: 2 Medium

Topic: Product warranties and guarantees; Unasserted claims and assessments; Gain contingencies

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

115) Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2021.

Item Reporting Method

___ 1. Customer advances. N. Not reported

___ 2. Noncommitted line of credit. C. Current liability

___ 3. Commercial paper. L. Long-term liability

___ 4. Note due June 9, 2022. D. Disclosure note only

___ 5. Accounts payable.

___ 6. Interest accrued on note, Dec. 31, 2021.

___ 7. Short-term bank loan to be paid with proceeds of sale of common stock.

Difficulty: 2 Medium

Topic: Credit line-Commercial paper-Notes; Accounts payable; Current and noncurrent classification

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.; 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

116) Indicate (by letter) the way each of the items listed below should be reported in a balance sheet at December 31, 2021.

Item Reporting Method

____ 1. Customer advances. N. Not reported

____ 2. Noncommitted line of credit. C. Current liability

____ 3. Commercial paper. L. Long-term liability

____ 4. Note due June 9, 2022. D. Disclosure note only

____ 5. Accounts payable.

____ 6. Long-term bonds that will be callable by the creditor in the upcoming

year unless an existing violation is not corrected (there is a reasonable

possibility the violation will be corrected within the grace period).

____ 7. Long-term bonds callable by the creditor in the upcoming year that are

not expected to be called.

____ 8. Estimated cost of quality-assurance warranty.

____ 9. Interest accrued on note, Dec. 31, 2021.

____ 10. Short-term bank loan to be paid with proceeds of sale of common stock.

____ 11. A material gain contingent on a future event that appears extremely likely

to occur in three months.

____ 12. Unasserted assessment of penalty that probably will be asserted, in which

case there would probably be a loss in six months.

____ 13. Unasserted assessment of penalty with a reasonable possibility of being

asserted, in which case there would probably be a loss in 13 months.

____ 14. A determinable loss from a past event that is contingent on a future event

that appears extremely likely to occur in three months.

Difficulty: 2 Medium

Topic: Accounts payable; Credit line―Commercial paper―Notes; Advance collections — Refundable deposits; Current and noncurrent classification; Loss contingencies; Product warranties and guarantees; Unasserted claims and assessments

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.; 13-04 Determine when a liability can be classified as a noncurrent obligation.; 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

117) Ontario Resources, a natural energy supplier, borrowed $80 million cash on November 1, 2021, to fund a geological survey. The loan was made by Quebec Banque under a short-term financing arrangement. Ontario Resources issued a 9-month, 12% promissory note with interest payable at maturity. Ontario Resources' fiscal period is the calendar year.

Required:

1. Prepare the journal entry for the issuance of the note by Ontario Resources.

2. Prepare the appropriate adjusting entry for the note by Ontario Resources on December 31, 2021. Show calculations.

3. Prepare the journal entry for the payment of the note at maturity. Show calculations.

Difficulty: 2 Medium

Topic: Credit line-Commercial paper-Notes; Accrued interest payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

118) On September 1, 2021, Triton Entertainment borrowed $24 million cash to fund a new Fun Park. The loan was made by Nevada Bank under a noncommitted short-term financing arrangement. Triton issued a 9-month, 12% promissory note. Interest was payable at maturity. Triton's fiscal period is the calendar year.

Required:

1. Prepare the journal entry for the issuance of the note by Triton.

2. Prepare the appropriate adjusting entry for the note by Triton on December 31, 2021.

3. Prepare the journal entry for the payment of the note at maturity.

Difficulty: 2 Medium

Topic: Credit line-Commercial paper-Notes; Accrued interest payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

119) On May 1, Lectric Industries issued 9-month notes in the amount of $60 million. Interest is payable at maturity.

Required:

Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:

Interest rate Fiscal Year-End

1. 8% January 31

2. 10% October 31

3. 9% June 30

4. 13% December 31

Difficulty: 3 Hard

Topic: Accrued interest payable

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

120) Grossman Products began operations in 2021. The following selected transactions occurred from September 2021 through March 2022. Grossman's fiscal year ends on December 31.

2021:

(a.) On September 5, Grossman opened a checking account and negotiated a short-term line of credit of up to $10,000,000 at 10% interest. The company is not required to pay any commitment fees.

(b.) On October 1, Grossman borrowed $8,000,000 cash and issued a 5-month promissory note with 10% interest payable at maturity.

(c.) Grossman received $3,000 of refundable deposits in December for reusable containers.

(d.) For the September through December period, sales totaled $5,000,000. The state sales tax rate is 4% and 75% of sales are subject to sales tax.

(e.) Grossman recorded accrued interest.

2022:

(f.) Grossman paid the promissory note on the March 1 due date.

(g.) Half of the storage containers are returned in March, with the other half expected to be returned over the next 6 months.

Required:

1. Prepare the appropriate journal entries for the 2021 transactions.

2. Prepare the liability section of the balance sheet at December 31, 2021, based on the data supplied.

3. Prepare the appropriate journal entries for the events occurring in March of 2022.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes; Accrued interest payable; Advance collections-Refundable deposits; Advance collections-For third parties

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

121) Bencorp issues a $90,000, 6-month, noninterest-bearing note that the bank discounted at a 10% discount rate.

Required:

1. Prepare the appropriate journal entry to record the issuance of the note.

2. Determine the effective interest rate.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

122) On November 1, 2021, a $216,000, 9-month, noninterest-bearing note is issued at a 10% discount rate.

Required:

1. Prepare the appropriate journal entry to record the issuance of the note.

2. Determine the effective interest rate.

3. Prepare the appropriate journal entry on December 31, 2021, to record interest on the note for the 2021 financial statements.

4. Prepare the appropriate journal entry(s) on July 31, 2022, to record interest and the payment of the note.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes; Accrued interest payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

123) On November 1, 2021, Ziegler Products issued a $200,000, 9-month, noninterest-bearing note to the bank. Interest was discounted at a 12% discount rate.

Required:

1. Prepare the appropriate journal entry by Ziegler to record the issuance of the note.

2. Determine the effective interest rate.

3. Suppose the note had been structured as a 12% note with interest and principal payable at maturity. Prepare the appropriate journal entry to record the issuance of the note by Ziegler.

4. Prepare the appropriate journal entry on December 31, 2021, to accrue interest expense on the note described requirement 3, for the 2021 financial statements.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes; Accrued interest payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

124) On October 1, 2021, Home Builders Company issued to Carlton Bank a $600,000, 8-month, noninterest-bearing note. Interest was discounted by the bank at a 12% discount rate.

Required:

1. Prepare the appropriate journal entry by Home Builders to record the issuance of the note.

2. Determine the effective interest rate.

3. Suppose the note had been structured as a 12% note with interest and principal payable at maturity. Prepare the appropriate journal entry to record the issuance of the note by Home Builders.

4. Prepare the appropriate journal entry on December 31, 2021, to accrue interest expense on the note described in requirement 3, for the 2021 financial statements.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes; Accrued interest payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

125) The following selected transactions relate to liabilities of Rose Dish Corporation. Rose's fiscal year ends on December 31.

Required:

Prepare the appropriate journal entries through the maturity of each liability.

2021

Feb. 3 Negotiated a revolving credit agreement with Second Bank, which can be renewed annually upon bank approval. The amount available under the line of credit is $30,000,000 at the bank's prime rate.

April 1 Arranged a 3-month bank loan of $12 million with Second Bank under the line of credit agreement. Interest at the prime rate of 8% was payable at maturity.

July 1 Paid the 8% loan at maturity.

Nov. 1 Supported by the credit agreement, issued $20 million of commercial paper on a 9-month note. Interest was discounted at issuance at a 6% discount rate.

Dec. 31 Recorded any necessary adjusting entry(s).

2022

Aug. 1 Paid the commercial paper at maturity.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes; Accrued interest payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

126) Stern Corporation borrowed $10 million cash on September 1, 2021, to provide additional working capital for the year's production. Stern issued a 6-month, 10% promissory note to Second State Bank. Interest on the note is payable at maturity. Each firm uses the calendar year as the fiscal year.

Required:

1. Prepare all journal entries from issuance to maturity for Stern Corporation.

2. Prepare all journal entries from issuance to maturity for Second State Bank.

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes; Accrued interest payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

127) Hot Springs Marine borrowed $20 million cash on December 1, 2021, to provide working capital for year-end inventory. Hot Springs Marine issued a 4-month, 9% promissory note to Third Bank under a prearranged short-term financing arrangement. Interest on the note was payable at maturity. Each firm's fiscal period is the calendar year.

Required:

1. Prepare the journal entries to record (a) the issuance of the note by Hot Springs Marine and (b) Third Bank's receivable on December 1, 2021.

2. Prepare the journal entries by both firms to record all subsequent events related to the note through March 31, 2022.

3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 9% is the bank's stated "discount rate." Prepare the journal entries to record the issuance of the noninterest-bearing note by Hot Springs Marine on December 1, 2021. What would be the effective interest rate?

Difficulty: 3 Hard

Topic: Credit line-Commercial paper-Notes; Accrued interest payable

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.; 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

128) On June 30, 2021, Chu Industries issued 9-month notes in the amount of $700,000. Assume that interest is payable at maturity in the following three independent cases:

Required:

Determine the amount of interest expense that should be accrued in a year-end adjusting entry under each assumption:

Difficulty: 3 Hard

Topic: Accrued interest payable

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

129) The following selected transactions relate to liabilities of Chicago Glass Corporation for 2021. Chicago's fiscal year ends on December 31.

1. On January 15, Chicago received $7,000 from Henry Construction toward the purchase of $66,000 of plate glass to be delivered on February 6.

2. On February 3, Chicago received $6,700 of refundable deposits relating to containers used to transport glass components.

3. On February 6, Chicago delivered the plate glass to Henry Construction and received the balance of the purchase price.

4. First quarter credit sales totaled $700,000. The state sales tax rate is 4% and the local sales tax rate is 2%.

Required:

Prepare journal entries for the above transactions.

Difficulty: 2 Medium

Topic: Advance collections-Deferred revenue; Advance collections-Refundable deposits; Advance collections-For third parties

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

130) In its 2021 annual report to shareholders, Ank-Morpork Times Inc. included the following disclosure:

Revenue Recognition

• Advertising revenue is recognized when advertisements are published, are broadcast, or when placed on the Company's websites, net of provisions for estimated rebates, credit and rate adjustments and discounts.

• Circulation revenue includes single copy and home-delivery subscription revenue. Single copy revenue is recognized based on date of publication, net of provisions for related returns. Proceeds from home-delivery subscriptions and related costs, principally agency commissions, are deferred at the time of sale and are recognized in earnings on a pro rata basis over the terms of the subscriptions.

• Other revenue is recognized when the related service or product has been delivered.

Also, the following information on its current liabilities was included in its comparative balance sheets:

Required:

Assuming that Ank-Morpork Times Inc. collected $440,000,000 in cash for home-delivery subscriptions during fiscal year 2021, what amount of revenue did it recognize during 2021 from this source? Show the relevant T-account information to support your answer.

Difficulty: 2 Medium

Topic: Advance collections-Deferred revenue

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

131) MullerB Company's employees earn vacation time at the rate of 1 hour per 40-hour work period. The vacation pay vests immediately, meaning an employee is entitled to the pay even if employment terminates. During 2021, total salaries paid to employees equaled $808,000, including $8,000 for vacations actually taken in 2021, but not including vacations related to 2021 that will be taken in 2022. All vacations earned before 2021 were taken before January 1, 2021. No accrual entries have been made for the vacations.

Required:

Prepare the appropriate adjusting entry for vacations earned but not taken in 2021.

Difficulty: 3 Hard

Topic: Accrued employee compensation

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

132) The following facts relate to gift cards sold by Sunbru Coffee Company during 2021. Sunbru's fiscal year ends on December 31.

(a.) In October 2021, sold $3,000 of gift cards, and redeemed $500 of those gift cards.

(b.) In November 2021, sold $4,000 of gift cards, and redeemed $1,400 of October gift cards and $700 of November gift cards.

(c.) In December 2021, sold $3,000 of gift cards, and redeemed $200 of October gift cards, $2,000 of November gift cards, and $400 of December gift cards.

(d.) Sunbru views a gift card to be "broken" (with a remote probability of redemption) two months after the end of the month in which it is sold. Thus, an unredeemed gift card sold at any time during July would be viewed as broken as of September 30.

Required:

1. Prepare all journal entries appropriate to be recorded only during the month of December 2021 relevant to gift card sales, gift card redemptions, and gift card breakage.

2. Determine the balance of the deferred revenue liability to be reported in the December 31, 2021, balance sheet. Show the relevant T-account information to support your answer.

Difficulty: 3 Hard

Topic: Advance collections-Gift cards

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

133) Diversified Industries sells perishable electronic products. Some must be shipped in reusable containers. Customers pay a deposit for each container. The deposit is equal to the container's cost. Customers receive a refund when the container is returned. During 2021, deposits collected on containers shipped were $700,000. Deposits are forfeited if containers are not returned in 18 months. Containers held by customers on January 1, 2021, were $330,000. During 2021, $410,000 was refunded and deposits of $25,000 were forfeited.

Required:

1. Prepare the appropriate journal entries for the deposits received and returned during 2021.

2. Determine the liability for refundable deposits to be reported in the December 31, 2021, balance sheet.

Difficulty: 2 Medium

Topic: Advance collections-Refundable deposits

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

134) At December 31, 2021, Cordova Leather's liabilities include the following:

1. $15 million of noncallable 9% notes were issued for $15 million on August 31, 1994. The notes mature on July 31, 2022. Sufficient cash is expected to be available to retire the notes at maturity.

2. $30 million of 8% notes were issued for $30 million on May 31, 2014. The notes mature on May 31, 2024, but investors have the option of calling (demanding payment on) the notes on June 30, 2022. However, the call option is not expected to be exercised, given prevailing market conditions.

3. $18 million of 10% notes are due on March 31, 2023. A debt covenant requires Cordova to maintain current assets at least equal to 150% of its current liabilities. On December 31, 2021, Cordova is in violation of this covenant. Cordova obtained a waiver from Village Bank until June 2022, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2022.

Required:

For each of the three liabilities, indicate the portion of the debt that can be excluded from classification as a current liability (that is, reported as a noncurrent liability). Explain.

Difficulty: 3 Hard

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

135) In its 2021 annual report to shareholders, Border Airlines Inc. presented the following balance sheet information about its liabilities:

In addition, Border presented the following among its note disclosures:

Maturities of long-term debt (including sinking fund requirements) for the next five years are: 2022 — $421 million; 2023 — $212 million; 2024 — $273 million; 2025 — $1.0 billion; 2026 — $777 million.

Difficulty: 3 Hard

Topic: Current and noncurrent classification

Learning Objective: 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

136) Mozart Music Co. began operations in December of 2021. The company sold gift certificates during December in various amounts totaling $1,600. The gift certificates are redeemable for merchandise within three years of the purchase date. However, experience within the industry predicts that 90% of gift certificates will be redeemed within one year. Certificates totaling $500 were presented for redemption during 2021 as part of merchandise purchases having a total retail price of $750.

Required:

1. Determine the liability for gift certificates to be reported in the December 31, 2021, balance sheet.

2. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2021? Show calculations.

Difficulty: 3 Hard

Topic: Advance collections-Gift cards

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

Use the following to answer the question(s) below:

In its 2021 annual report to shareholders, the Goodday Chemical Company included the following disclosure note excerpts on CONTINGENCIES in its annual report to shareholders:

At December 31, 2021, Goodday had recorded liabilities aggregating $66.5 million for anticipated costs related to various environmental matters, primarily the remediation of numerous waste disposal sites and certain properties sold by Goodday. These costs include legal and consulting fees, site studies, the design and implementation of remediation plans, post-remediation monitoring and related activities and will be paid over several years. The amount of Goodday's ultimate liability in respect of these matters may be affected by several uncertainties, primarily the ultimate cost of required remediation and the extent to which other responsible parties contribute.

At December 31, 2021, Goodday had recorded liabilities aggregating $218.7 million for potential product liability and other tort claims, including related legal fees expected to be incurred, presently asserted against Goodday. The amount recorded was determined on the basis of an assessment of potential liability using an analysis of available information with respect to pending claims, historical experience, and, where available, current trends.

Goodday is a defendant in numerous lawsuits involving at December 31, 2021, approximately 63,000 claimants alleging various asbestos-related personal injuries purported to result from exposure to asbestos in certain rubber-coated products manufactured by Goodday in the past or in certain Goodday facilities. Typically, these lawsuits have been brought against multiple defendants in state and federal courts. In the past, Goodday has disposed of approximately 22,000 cases by defending and obtaining the dismissal thereof or by entering into a settlement. Goodday has policies and coverage-in-place agreements with certain of its insurance carriers that cover a substantial portion of estimated indemnity payments and legal fees in respect of the pending claims. At December 31, 2021, Goodday has recorded an asset in the amount it expects to collect under the policies and coverage-in-place agreements with certain carriers related to its estimated asbestos liability. Goodday has also commenced discussions with certain of its excess coverage insurance carriers to establish arrangements in respect of their policies.

Subject to the uncertainties referred to above, Goodday has concluded that in respect of any of the above described liabilities, it is not reasonably possible that it would incur a loss exceeding the amount recognized at December 31, 2021, with respect thereto which would be material relative to the consolidated financial position, results of operations, or liquidity of Goodday.

137) Briefly explain the GAAP requirement from which the costs/obligations for environmental cleanup and product liability/tort claim matters were accrued in the financial statements.

Difficulty: 2 Medium

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

138) What is the point of the last paragraph of the Goodday disclosure? Explain in terms of authoritative GAAP.

Difficulty: 2 Medium

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

139) Prepare the summary journal entry that Goodday recorded for the environmental cleanup and product liability/tort claim matters, described in the note disclosure.

Difficulty: 3 Hard

Topic: Unasserted claims and assessments

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

140) The following selected transactions relate to contingencies of Eastern Products Inc., which began operations in July 2021. Eastern's fiscal year ends on December 31. Financial statements are published in April 2022.

1. No customer accounts have been shown to be uncollectible as yet, but Eastern estimates that 3% of credit sales will eventually prove uncollectible. Sales were $300 million (all credit) for 2021.

2. Eastern offers a one-year warranty against manufacturer's defects for all its products. Industry experience indicates that warranty costs will approximate 2% of sales. Actual warranty expenditures were $3.5 million in 2021 and were recorded as warranty expense when incurred.

3. In December 2021, Eastern became aware of an engineering flaw in a product that poses a potential risk of injury. As a result, a product recall appears inevitable. This move would likely cost the company $1.5 million.

4. In November 2021, the State of Vermont filed suit against Eastern, asking civil penalties and injunctive relief for violations of clean water laws. Eastern reached a settlement with state authorities to pay $4.2 million in penalties on February 3, 2022.

5. Eastern is the plaintiff in a $40 million lawsuit filed against a customer for costs and lost profits from contracts rejected in 2021. The lawsuit is in final appeal and attorneys advise that it is virtually certain that Eastern will be awarded $30 million.

Required:

Prepare the appropriate journal entries that should be recorded as a result of each of these contingencies. If no journal entry is indicated, state why.

Difficulty: 3 Hard

Topic: Product warranties and guarantees; Loss contingencies; Unasserted claims and assessments

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

141) The following selected transactions relate to contingencies of Bowe-Whitney Inc. Bowe-Whitney's fiscal year ends on December 31, 2021, and financial statements are published in March 2022.

1. Bowe-Whitney is involved in a lawsuit resulting from a dispute with a customer over a 2021 transaction. At December 31, attorneys advised that it was probable that Bowe-Whitney would lose $3 million in an unfavorable outcome. On February 12, 2022, judgment was rendered against Bowe-Whitney in the amount of $14 million plus interest, a total of $15.2 million. Bowe-Whitney does not plan to appeal the judgment.

2. Since August of 2021, Bowe-Whitney has been involved in labor disputes at two of its facilities. Negotiations between the company and the unions have not produced a settlement and, since January 2021, strikes have been ongoing at these facilities. It is virtually certain that material costs will be incurred but the amount of resultant costs cannot be adequately predicted.

3. Bowe-Whitney is the defendant in a lawsuit filed in January 2022 in which Access Company seeks $10 million as an adjustment to the purchase price related to the sale of Bowe-Whitney's hardwood division in 2021. The lawsuit alleges that Bowe-Whitney misrepresented the division's assets and liabilities. Legal counsel advises that it is reasonably possible that Bowe-Whitney could lose $5 million, but that it's extremely unlikely it could lose the $10 million asked for.

4. At March 1, 2022, the EPA is in the process of investigating the possibility of environmental violations at one of Bowe-Whitney's sites, but has not proposed a penalty assessment. Management feels an assessment is reasonably possible, and if an assessment is made, a settlement of up to $33 million is probable.

Required:

Prepare journal entries that should be recorded as a result of each of the above contingencies.

Difficulty: 3 Hard

Topic: Loss contingencies; Unasserted claims and assessments

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application; Communication

AICPA/Accessibility: FN Measurement

142) Concept 1 Office Products sells office electronics that carry a 60-day manufacturer's warranty. At the time of purchase, customers are offered the opportunity to also buy a 1-year or 2-year extended warranty for an additional charge.

Required:

1. Does the sale of the extended warranty represent a loss contingency?

2. Provide journal entries for the extended warranty sales and revenue recognition.

Difficulty: 3 Hard

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application; Communication

AICPA/Accessibility: FN Measurement

143) In its 2021 annual report to shareholders, Hyer Aviation Group Inc. included the following disclosure:

On October 6, 2020, the company's subsidiary, Pyro Aeroplex, filed suit against Syntex, an unincorporated division of Bright American Corporation, for breach of contract and fraud with regard to the supply of deficient wire rope that is installed as aircraft flight control cables on WD-50 aircraft. The case, filed in the circuit court of Bell County, Arkansas, was brought to trial and on September 20, 2021, a jury returned with a verdict in favor of the company in the amount of $17.5 million. The Court, upon a post-judgment motion filed by Pyro, reduced the judgment to $4.5 million. Pyro has appealed that Order to the Supreme Court of Arkansas. The company believes the appeal is without merit and will continue to pursue final judgment on the Order. The company, pending appeal, has not recorded the $4.5 million favorable judgment.

Required:

What journal entries, if any, has Hyer recorded regarding this contingency? Explain its rationale.

Difficulty: 2 Medium

Topic: Gain contingencies

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement

Use the following to answer the question(s) below:

The following facts apply to TinyPart Toy Company's pending litigation as of December 31, 2021:

a. TinyPart is defending against a lawsuit and believes there is a 51% chance it will lose in court. If it loses, TinyPart estimates that damages will be $100,000.

b. TinyPart is defending against another lawsuit for which management believes it is virtually certain to lose in court. If it loses the lawsuit, management estimates damages will fall somewhere in the range of $30,000 to $50,000, with each amount in that range equally likely to occur.

c. TinyPart is defending against another lawsuit that is identical to item (b), but the relevant losses will only occur far into the future. The present values of the endpoints of the range are $15,000 and $25,000. TinyPart's management believes the effects of time value of money on these amounts are material, but also believes the timing of these amounts is uncertain.

d. TinyPart is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in court. If TinyPart loses, it believes damages will fall somewhere in the range of $35,000 to $40,000, with each amount in that range equally likely to occur.

144) Indicate how TinyPart would disclose or account for the lawsuit described in part (a) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2021.

Difficulty: 2 Medium

Topic: Loss contingencies; IFRS ‒ Contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Analyze

AACSB: Analytical Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement

145) Indicate how TinyPart would disclose or account for the lawsuit described in part (b) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2021.

Difficulty: 2 Medium

Topic: Loss contingencies; IFRS ‒ Contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Analyze

AACSB: Analytical Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement

146) Indicate how TinyPart would disclose or account for the lawsuit described in part (c) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2021.

Difficulty: 2 Medium

Topic: Loss contingencies; IFRS ‒ Contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Analyze

AACSB: Analytical Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement

147) Indicate how TinyPart would disclose or account for the lawsuit described in part (d) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2021.

Difficulty: 2 Medium

Topic: Loss contingencies; IFRS ‒ Contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-07 Discuss the primary differences between U.S. GAAP and IFRS with respect to current liabilities and contingencies.

Bloom's: Analyze

AACSB: Analytical Thinking; Diversity

AICPA/Accessibility: BB Global; FN Measurement

148) In 2021, Cap City Inc. introduced a new line of televisions that carry a two-year warranty against manufacturer's defects. Based on past experience with similar products, warranty costs are expected to be approximately 1% of sales during the first year of the warranty and approximately an additional 3% of sales during the second year of the warranty. Sales were $6,000,000 for the first year of the product's life and actual payments for warranty expenditures were $29,000. Assume that all sales are on credit.

Required:

1. Prepare journal entries to summarize the sales and any aspects of the warranty for 2021.

2. What amount should Cap City report as a liability at December 31, 2021?

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

149) Albertson Corporation began a special promotion in July 2021 in an attempt to increase sales. A coupon was provided at various grocery stores upon checkout. Customers could send in five coupons to receive $3.00. Albertson's management estimated that 80% of the coupons would be redeemed. Albertson recognizes coupon expense in the period the coupons are issued. For the six months ended December 31, 2021, the following information is available:

Required:

What is the estimated liability associated with the coupons at December 31, 2021?

Difficulty: 3 Hard

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

150) Fusion, Inc. introduced a new line of circuits in 2021 that carry a four-year warranty against manufacturer's defects. Based on experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual payments for warranty expenditures for the first year of selling the product were:

Actual warranty

Sales Payments for expenditures

$15 million $200,000

Required:

1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for?

2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2021.

3. What amount should Fusion report as a liability at December 31, 2021?

Difficulty: 2 Medium

Topic: Loss contingencies; Product warranties and guarantees

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication; Knowledge Application

AICPA/Accessibility: FN Measurement

151) Barone, Inc. is involved with several situations that possibly involve contingencies. Each is described below. Barone's fiscal year ends December 31, and the 2021 financial statements are issued on March 1, 2022.

1. At March 1, 2022, the EPA is in the process of investigating possible chemical leaks at two of Barone's facilities, but has not proposed a deficiency assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $8 million is reasonably possible.

2. Barone is the plaintiff in a $33 million lawsuit filed against Faze Corp. for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Finley will prevail and be awarded $25 million.

3. In July 2020, the State of Arkansas filed suit against Barone, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On February 12, 2022, Barone reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $13 million will be required to cover the cost of violations. Barone believes that the ultimate settlement of this claim will not have a material adverse effect on the company.

4. Barone is involved in a lawsuit resulting from a dispute with a customer. On January 5, 2022, judgment was rendered against Barone in the amount of $16 million plus interest, a total of $18 million. Barone plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company.

Required:

1. Determine the appropriate means of reporting each situation. Explain your reasoning.

2. Prepare any necessary journal entries and disclosure notes.

Difficulty: 3 Hard

Topic: Loss contingencies; Unasserted claims and assessments; Gain contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

152) At the beginning of 2021, Scarlet Industries began providing a three-year warranty on its products. The warranty program was expected to cost Scarlet 2% of net sales, approximately equally over the three-year warranty period. Net sales made under warranty in 2021 were $270 million. Thirteen percent of the units sold were returned in 2021 and repaired or replaced at a cost of $2 million. This amount was debited to warranty expense as incurred.

Required:

Prepare the appropriate adjusting entry to adjust warranty expense on December 31, 2021. Show calculations.

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

153) Yummy Rice Cereal started a program at the beginning of 2021 in which it would provide an all-star bowl in exchange for three proof-of-purchase box tops. Yummy Rice estimates that 30% of box tops will be redeemed. The bowls cost Yummy Rice $1 each. In 2021, 5,000,000 boxes of cereal were sold. By year-end 900,000 box tops had been redeemed.

Required:

Calculate the premium expense that Yummy Rice should recognize for the year ended December 31, 2021.

Difficulty: 3 Hard

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

154) Sunnyvale Computer Company sells a line of computers that carry a six-month warranty. Customers are offered the opportunity to buy a two-year extended warranty for an additional charge. During 2021, Sunnyvale received $320,000 from customers for these extended warranties. All sales are on credit, and funds are received evenly throughout the year and the warranties go into effect immediately after purchase.

Required:

Prepare a summary journal entry to record sales of the extended warranties. Also prepare any other entries associated with the warranties that should be recorded during 2021.

Difficulty: 2 Medium

Topic: Product warranties and guarantees

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

155) Hardin Widget Manufacturing began operations in January 2021. Hardin sells widgets that carry a two-year manufacturer's warranty against defects in workmanship. Hardin's management projects that 2% of the widgets will require repair during the first year of the warranty while approximately 6% will require repair during the second year of the warranty. The widgets sell for $400 each. The average cost to repair a widget is $50. The company sells 60% of the widgets to retail customers who must pay a 6% sales tax. Sales and warranty information for 2021 and 2022 are as follows:

2021: Sold 200 widgets on account; incurred warranty expenditures of $300 for widget repairs.

2022: Sold 300 widgets on account; actual payments for warranty expenditures were $500.

Required:

1. Prepare journal entries that summarize the sales and any aspects of the warranty for 2021.

2. Prepare journal entries that summarize the sales and any aspects of the warranty for 2022.

Difficulty: 3 Hard

Topic: Loss contingencies; Advance collections ‒ For third parties; Product warranties and guarantees

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

156) Cracker Corporation began a special promotion in July 2021 in an attempt to increase sales. A coupon was included in various print advertisements. Customers could send in five coupons to receive $2.00. Cracker's management estimated that 70% of the coupons would be redeemed. Cracker recognizes coupon promotion expense in the period the coupons are issued. For the six months ended December 31, 2021, the following information is available:

Coupons distributed 2,000,000

Coupons redeemed 560,000

Record all necessary journal entries for the coupon offer for 2021.

Difficulty: 3 Hard

Topic: Rebates‒Premiums‒Coupons

Learning Objective: 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

157) Muller Corp. pays its employees monthly. The payroll information listed below is for January 2021, the first month of Muller's fiscal year.

Salaries $400,000

Federal income taxes to be withheld 80,000

Federal unemployment tax rate (FUTA) 0.80%

State unemployment tax rate (after FUTA deduction) 5.40%

Social Security tax rate 6.2%

Medicare tax rate 1.45%

Required:

Prepare the appropriate journal entries to record salaries expense and payroll tax expense for the January 2021 pay period.

Difficulty: 3 Hard

Topic: Payroll-related liabilities‒Appendix

Learning Objective: 13-Appendix 13

Bloom's: Apply

AACSB: Knowledge Application

AICPA/Accessibility: FN Measurement

158) Identify the major components included in the official definition of a liability as set forth by Statement of Financial Accounting Concepts No. 6, "Elements of Financial Statements."

Difficulty: 1 Easy

Topic: Characteristics of liabilities

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

159) Define the following:

1. Liabilities that are definite in amount.

2. Liabilities that must be estimated.

3. Liabilities that are contingent.

Difficulty: 2 Medium

Topic: Characteristics of liabilities; Loss contingencies

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

160) Bank loans are often arranged in advance as lines of credit. What is a line of credit? How do a committed and a noncommitted line of credit differ?

Difficulty: 2 Medium

Topic: Credit line-Commercial paper-Notes

Learning Objective: 13-02 Account for the issuance and payment of various forms of notes and record the interest on the notes.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

161) How are customer advances and refundable deposits similar and yet different?

Difficulty: 2 Medium

Topic: Advance collections-Deferred revenue; Advance collections-Refundable deposits

Learning Objective: 13-03 Characterize accrued liabilities and liabilities from advance collection and describe when and how they should be recorded.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

162) Define and distinguish between current and noncurrent liabilities.

Difficulty: 1 Easy

Topic: Characteristics of liabilities; Current and noncurrent classification

Learning Objective: 13-01 Define liabilities and distinguish between current and long-term liabilities.; 13-04 Determine when a liability can be classified as a noncurrent obligation.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

163) a) What non-accounting factors are important before evaluating whether a pending lawsuit should be accrued as a liability and reflected in the financial statements?

b) What accounting factors should be considered in determining whether a pending lawsuit should be accrued as a liability and reflected in the financial statements?

Difficulty: 2 Medium

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Understand

AACSB: Reflective Thinking; Communication

AICPA/Accessibility: FN Measurement

164) Identify and define the three classifications prescribed by GAAP regarding accounting for contingencies to identify the range of possibilities for the likelihood of a confirming event for contingent liabilities. Describe the accounting action to be taken for each term.

Difficulty: 1 Easy

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Remember

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

165) Define a loss contingency and give an example that almost always is accrued.

Difficulty: 2 Medium

Topic: Loss contingencies; Product warranties and guarantees; Rebates ‒ Premiums ‒ Coupons

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Understand

AACSB: Reflective Thinking

AICPA/Accessibility: FN Measurement

166) Texon Oil is being sued for price fixing and environmental damage. The litigation started this year and is expected to last five years. There is no doubt that Texon is guilty, but the settlement cost will be between $3 billion and $22 billion. Briefly explain how Texon would address this in its current year financial statements.

Difficulty: 3 Hard

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Create

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

167) Amber Inc. is one of the largest pharmacy retailers in mid-America. In its 2021 annual report to shareholders, it made the following disclosure:

In 2016, Amber assigned a number of leases to Bell's Inc. and Home Stores, Inc., as part of the sale of the Company's former Eastern divisions. Amber is contingently liable if Bell's and Home are unable to continue making rental payments on these leases. In 2020, Amber recorded a pretax charge to earnings of $42.7 million to recognize the estimated lease liabilities associated with the Bell's and Home bankruptcies and for a single lease from Amber's former Georgia division. In 2021, Bell's began the liquidation process and Home emerged from bankruptcy and, based on the resolution of various leases, Amber reversed $12.1 million of this accrual.

Explain the accounting principle(s) that required Amber to record the $42.7 million charge in 2020 and the $12.1 million reversal in 2021.

Difficulty: 3 Hard

Topic: Loss contingencies; Unasserted claims and assessments

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.; 13-06 Demonstrate the appropriate accounting treatment for contingencies, including unasserted claims and assessments.

Bloom's: Analyze

AACSB: Analytical Thinking; Communication

AICPA/Accessibility: FN Measurement

168) Swift Drug Company is being sued this year for a wrongful death due to violation of FDA rules. There is no doubt that Swift is guilty and the settlement is reasonably estimable at $10 billion payable evenly over 10 years starting next year. Briefly explain how Swift would address this in its current year financial statements.

Difficulty: 2 Medium

Topic: Loss contingencies

Learning Objective: 13-05 Identify situations that constitute contingencies and the circumstances under which they should be accrued.

Bloom's: Create

AACSB: Analytical Thinking

AICPA/Accessibility: FN Measurement