Exam 13: Current Liabilities and Contingencies

Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is probable that a liability has been incurred.

Use the following information for questions Raney Co.is a retail store operating in a state with a 6% retail sales tax.The retailer may keep 2% of the sales tax collected.Raney Co.records the sales tax in the Sales account.The amount recorded in the Sales account during May was $148,400. -The amount of sales taxes (to the nearest dollar) for May is

Of the following items, the only one which should not be classified as a current liability is

On December 31, 2006, Frye Co.has $2,000,000 of short-term notes payable due on February 14, 2007.On January 10, 2007, Frye arranged a line of credit with County Bank which allows Frye to borrow up to $1,500,000 at one percent above the prime rate for three years.On February 2, 2007, Frye borrowed $1,200,000 from County Bank and used $500,000 additional cash to liquidate $1,700,000 of the short-term notes payable.The amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2006 balance sheet which is issued on March 5, 2007 is

Which of the following items is a current liability?

Included in Sauder Corp.'s liability account balances at December 31, 2006, were the following: 7% note payable issued October 1, 2006, maturing September 30, 2007 $250,000 8% note payable issued April 1, 2006, payable in six equal annual Installments of $150,000 beginning April 1, 2007 600,000 Sauder 's December 31, 2006 financial statements were issued on March 31, 2007.On January 15, 2007, the entire $600,000 balance of the 8% note was refinanced by issuance of a long-term obligation payable in a lump sum.In addition, on March 10, 2007, Sauder consummated a noncancelable agreement with the lender to refinance the 7%, $250,000 note on a long-term basis, on readily determinable terms that have not yet been implemented.On the December 31, 2006 balance sheet, the amount of the notes payable that Sauder should classify as short-term obligations is

Lett Co.has a probable loss that can only be reasonably estimated within a range of outcomes.No single amount within the range is a better estimate than any other amount.The loss accrual should be

Information available prior to the issuance of the financial statements indicates that it is probable that, at the date of the financial statements, a liability has been incurred for obligations related to product warranties.The amount of the loss involved can be reasonably estimated.Based on the above facts, an estimated loss contingency should be

In 2006, Slimon Corporation began selling a new line of products that carry a two-year warranty against defects.Based upon past experience with other products, the estimated warranty costs related to dollar sales are as follows: First year of warranty $\quad 2 \%$ Second year of warranty $\quad 5 \%$ Sales and actual warranty expenditures for 2006 and 2007 are presented below: 2006 2007 Sales \ 300,000 \ 400,000 Actual warranty expenditures 10,000 20,000 What is the estimated warranty liability at the end of 2007?

A company buys an oil rig for $2,000,000 on January 1, 2007.The life of the rig is 10 years and the expected cost to dismantle the rig at the end of 10 years is $400,000 (present value at 10% is $154,220).10% is an appropriate interest rate for this company.What expense should be recorded for 2007 as a result of these events?

Wellman Company self insures its property for fire and storm damage.If the company were to obtain insurance on the property, it would cost them $1,000,000 per year.The company estimates that on average it will incur losses of $800,000 per year.During 2007, $350,000 worth of losses were sustained.How much total expense and/or loss should be recognized by Wellman Company for 2007?

Timmons Co., which has a taxable payroll of $500,000, 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 Timmons Co.?

Companies should recognize the expense and related liability for compensated absences in the year earned by employees.

Under the expense warranty approach, companies charge warranty costs only to the period in which they comply with the warranty.

On January 3, 2007, Alton Corp.owned a machine that had cost $200,000.The accumulated depreciation was $120,000, estimated salvage value was $12,000, and fair market value was $320,000.On January 4, 2007, this machine was irreparably damaged by Reed Corp.and became worthless.In October 2007, a court awarded damages of $320,000 against Reed in favor of Alton.At December 31, 2007, the final outcome of this case was awaiting appeal and was, therefore, uncertain.However, in the opinion of Alton's attorney, Reed's appeal will be denied.At December 31, 2007, what amount should Alton accrue for this gain contingency?

Dividends in arrears on cumulative preferred stock should be recorded as a current liability.

Mark Ward is a farmer who owns land which borders on the right-of-way of the Northern Railroad.On August 10, 2007, due to the admitted negligence of the Railroad, hay on the farm was set on fire and burned.Ward had had a dispute with the Railroad for several years concerning the ownership of a small parcel of land.The representative of the Railroad has offered to assign any rights which the Railroad may have in the land to Ward in exchange for a release of his right to reimbursement for the loss he has sustained from the fire.Ward appears inclined to accept the Railroad's offer.The Railroad's 2007 financial statements should include the following related to the incident:

The cause for litigation must have occurred on or before the date of the financial statements to report a liability in the financial statements.

Use of the accrual method in accounting for product warranty costs

A company discloses gain contingencies in the notes only when a high probability exists for realizing them.