Exam 13: Current Liabilities and Contingencies

A company gives each of its 50 employees (assume they were all employed continuously through 2007 and 2008) 12 days of vacation a year if they are employed at the end of the year.The vacation accumulates and may be taken starting January 1 of the next year.The employees work 8 hours per day.In 2007, they made $17.50 per hour and in 2008 they made $20 per hour.During 2008, they took an average of 9 days of vacation each.The company's policy is to record the liability existing at the end of each year at the wage rate for that year.What amount of vacation liability would be reflected on the 2007 and 2008 balance sheets, respectively?

During 2006, Blass Co.introduced a new product carrying a two-year warranty against defects.The estimated warranty costs related to dollar sales are 2% within 12 months following sale and 4% in the second 12 months following sale.Sales and actual warranty expenditures for the years ended December 31, 2006 and 2007 are as follows: Actual Warranty Sales Expenditures 2006 \ 800,000 \ 12,000 2007 1,000,000 30,000 \1 ,800,000 \4 2,000 $\text { At December } 31,2007 \text {, Blass should report an estimated warranty liability of }$

The total payroll of Waters Company for the month of October, 2007 was $360,000, of which $90,000 represented amounts paid in excess of $90,000 to certain employees.$300,000 represented amounts paid to employees in excess of the $7,000 maximum subject to unemployment taxes.$90,000 of federal income taxes and $9,000 of union dues were withheld.The state unemployment tax is 1%, the federal unemployment tax is .8%, and the current F.I.C.A.tax is 7.65% on an employee's wages to $90,000 and 1.45% in excess of $90,000.What amount should Waters record as payroll tax expense?

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

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

Use the following information for questions Kent Co.includes one coupon in each bag of dog food it sells.In return for eight coupons, customers receive a leash.The leashes cost Kent $2.00 each.Kent estimates that 40 percent of the coupons will be redeemed.Data for 2006 and 2007 are as follows: 2006 2007 Bags of dog food sold 500,000 600,000 Leashes purchased 18,000 22,000 Coupons redeemed 120,000 150,000 -The estimated liability for premiums at December 31, 2007 is

Which of the following should not be included in the current liabilities section of the balance sheet?

Lopez Corporation, a manufacturer of household paints, is preparing annual financial statements at December 31, 2007.Because of a recently proven health hazard in one of its paints, the government has clearly indicated its intention of having Lopez recall all cans of this paint sold in the last six months.The management of Lopez estimates that this recall would cost $800,000.What accounting recognition, if any, should be accorded this situation?

Unruh Co., which has a taxable payroll of $400,000, is subject to FUTA tax of 6.2% and a state contribution rate of 5.4%.However, because of stable employment experience, the company's state rate has been reduced to 2%.What is the total amount of federal and state unemployment tax for Unruh Co.?

A company offers a cash rebate of $1 on each $4 package of batteries sold during 2007.Historically, 10% of customers mail in the rebate form.During 2007, 6,000,000 packages of batteries are sold, and 210,000 $1 rebates are mailed to customers.What is the rebate expense and liability, respectively, shown on the 2007 financial statements dated December 31?

Holbert Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 75,000 shares of common stock.If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?

A company gives each of its 50 employees (assume they were all employed continuously through 2007 and 2008) 12 days of vacation a year if they are employed at the end of the year.The vacation accumulates and may be taken starting January 1 of the next year.The employees work 8 hours per day.In 2007, they made $14 per hour and in 2008 they made $16 per hour.During 2008, they took an average of 9 days of vacation each.The company's policy is to record the liability existing at the end of each year at the wage rate for that year.What amount of vacation liability would be reflected on the 2007 and 2008 balance sheets, respectively?

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

Dexter Co.sells major household appliance service contracts for cash.The service contracts are for a one-year, two-year, or three-year period.Cash receipts from contracts are credited to unearned service contract revenues.This account had a balance of $480,000 at December 31, 2006 before year-end adjustment.Service contract costs are charged as incurred to the service contract expense account, which had a balance of $120,000 at December 31, 2006.Outstanding service contracts at December 31, 2006 expire as follows: $\frac{\text { During 2007 }}{\$ 100,000} \quad \frac{\text { During 2008 }}{\$ 160,000} \quad \frac{\text { During 2009 }}{\$ 70,000}$ What amount should be reported as unearned service contract revenues in Dexter's December 31, 2006 balance sheet?

The ratio of current assets to current liabilities is called the

Use the following information for questions Simson Company has 35 employees who work 8-hour days and are paid hourly.On January 1, 2006, the company began a program of granting its employees 10 days of paid vacation each year.Vacation days earned in 2006 may first be taken on January 1, 2007.Information relative to these employees is as follows: Hourly Vacation Days Earned Vacation Days Used Year Wages by Each Employee by Each Emplovee 2006 \ 25.80 10 0 2007 27.00 10 8 2008 28.50 10 10 Simson has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. -What is the amount of expense relative to compensated absences that should be reported on Simson's income statement for 2006?

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

During 2006, Younger Co.introduced a new line of machines that carry a three-year warranty against manufacturer's defects.Based on industry experience, warranty costs are estimated at 2% of sales in the year of sale, 4% in the year after sale, and 6% in the second year after sale.Sales and actual warranty expenditures for the first three-year period were as follows: Sales Actual Warranty Expenditures 2006 \ 600,000 \ 8,000 2007 1,500,000 45,000 2008 2,100,000 135,000 \ 4,200,000 \ 189,000 What amount should Younger report as a liability at December 31, 2008?

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

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