Exam 10: Introduction to Liabilities: Economic Consequences, Current Liabilities, and Contingencies

Meadville Industries sells gift certificates that are redeemable in merchandise. During 2017, Meadville sold gift certificates for $88,000. Merchandise with the total price of $52,000 was redeemed during the year. For Meadville, the cost of the merchandise sold was $32,000. Meadville sold gift certificates for the first time in 2017. Assuming that Meadville uses the perpetual inventory method, the journal entry recording the redemption of the gift certificates during 2017 will include:

Current liabilities include

The recognition of a deferred tax liability that results from the use of straight-line depreciation on financial statements and double-declining balance on tax returns will

On October 1, Accurate Company borrowed $2,000 in return for a nine-month note payable with a maturity value of $2,600. Calculate the amount of interest expense and the balance sheet value for the year ending December 31.

A major airline issues frequent flyer credits that allow the passenger to receive credit toward future flights. For every ticket sold the customer receives a credit which, when 40 are collected, can be exchanged for a free ticket. During the year, the airline company recorded revenues of $60 million, which represented 100,000 tickets. The airline did not recognize the flyer credits on its income statement or its balance sheet. In the context of contingent liabilities, comment on the airline's accounting procedures.

Which one of the following would most likely be reported as a current liability?

Vista Corporation, producer of computer software packages, began operations on January 1. It acquired financing from the issuance of common stock for $60,000,000 and long-term debt for $80,000,000. At the beginning of business operations, Vista produced the following projected income statement and balance sheet for the first year. All amounts are in thousands. The new president is rather disappointed with these projected results having just quit a job of which his compensation package was $4,000,000. After examining the forecasts of a bonus of only $3,000,000, the president decides to use his knowledge of financial statements to modify his bonus. He meets with the company's CFO the next day to see what could be done. He suggested the following possibilities that would boost the first year's income: 1. Slash research and development expenditures, which are paid in cash, from $20 million to $10 million. 2. Double the estimated life of the computers, which will decrease depreciation expense from $40 million to $20 million. Because identical accounting procedures are used for taxes, no deferred taxes will be generated. Taxes require immediate payment. 3. Reduce estimated warranty expense from 10% of sales to 7% of sales. 4. Any resultant change in the bonus of 10% of operating income before the bonus will be paid to the president in cash. A. Adjacent to the income statement for Year 1, create a new statement using the alternative accounting procedures and operating decisions. B. Compare the president’s compensation if the changes in part A are enacted with his current compensation. What are the ramifications of these changes on the future?

As a security analyst for Market Masters, Inc., you have chosen to invest in one high-tech firm. You have narrowed your choice between RamTech Company or Accutrex Industries, firms of similar size and direct competitors in the industry. The following information was taken from their 2017 annual reports: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {RamTech}$$\quad$$\quad$$\quad$$\quad$$\quad$$\text {Accutrex}$ 2017 2016 2017 2016 Deferred income tax liability \ 19,400 \ 15,600 \ 19,800 \ 21,800 Income before taxes 163,000 158,500 Income tax expense (50,000) (52,500) Net income 113,000 106,000 Effective income tax rate 35\% 35\%

During the 1990's, Golden Inc. entered into long-term contracts with corporate customers to supply one million ounces of ore for $100 an ounce over the next 5 years. During the following years, the price of ore increased to $175 an ounce, which Golden Inc., because it did not hedge the price, would have to pay in order to meet its sales contracts. Although Golden Inc.'s auditor argued that a $75 million loss and liability should be recognized, Golden Inc. stated that the amount of the loss cannot be reasonably estimated prior to the results of renegotiations it was conducting with its corporate customers. Golden Inc. expected to renegotiate an increase in the initial contract price of $100 or reduce the amount of ounces to be delivered under the long-term sales contract. Defend a position of how the long-term contract should be treated from an accounting perspective.

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively. If Jake invests the entire $100,000 of the borrowed funds in equipment, what is the maximum amount of current liabilities it could have without violating the debt contract?

If the quick ratio is currently greater than 1.0, which one of the following events would increase the quick ratio?

Accruing warranty expense will

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively. If Jake invests $80,000 of the borrowed funds in equipment and keeps the rest as cash or short-term investment, what would be its current ratio?

A liability for a deposit may arise because

Dividends payable typically arise because

Which one of the following would increase the bonus for a CEO who is paid a bonus equal to a percentage of current GAAP net income?

Jake Company borrowed $100,000 from Guaranty Trust Bank to finance the purchase of new equipment. The loan contract provides for a 12 percent annual interest rate and states that the principal must be paid in full in ten years. The contract also requires that Jake maintains a current ratio of 1.5:1. Before Jake borrowed the $100,000, the company's current assets and current liabilities were $120,000 and $68,000 respectively. If Jake invests the entire $100,000 of the borrowed funds in equipment, what would be its current ratio?

Contingent liabilities whose ultimate payment is reasonably probable should be

Two types of differences exist between computing income for tax purposes and computing income for financial accounting purposes. The differences are