Exam 13: Current Liabilities and Contingencies

During 2013, Salton 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 1% of sales in the year of sale, 3% in the year after sale, and 4% in the second year after sale. Sales and actual warranty expenditures for the first three-year period were as follows: (assume the accrual method) What amount should Salton report as a liability at December 31, 2015? A) $0 B) $14,000 C) $22,000 D) $148,000

The expected profit from a sales type warranty that covers several years should all be recognized in the period the warranty is sold.

Wooten Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Wooten's lawyer states that it is probable that Wooten will lose the suit and be found liable for a judgment costing Wooten anywhere from $1,600,000 to $8,000,000. However, the lawyer states that the most probable cost is $4,800,000. As a result of the above facts, Wooten should accrue

Which of the following best describes the cash-basis method of accounting for warranty costs?

An employee's net (or take-home) pay is determined by gross earnings minus amounts for income tax withholdings and the employee's

What are compensated absences?

Which of the following is not an acceptable treatment for the presentation of current liabilities?

How do you determine the acid-test ratio?

The numerator of the acid-test ratio consists of

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

Included in Vernon Corp.'s liability account balances at December 31, 2014, were the following:7% note payable issued October 1, 2014, maturing September 30, 2015 $250,0008% note payable issued April 1, 2014, payable in six equal annualinstallments of $150,000 beginning April 1, 2015 600,000Vernon's December 31, 2014 financial statements were issued on March 31, 2015. On January 15, 2015, 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, 2015, Vernon 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, 2014 balance sheet, the amount of the notes payable that Vernon should classify as short-term obligations is

Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles?

Liabilities are

Use the following information for questions 100 and 101. Posner Co. is a retail store operating in a state with a 7% retail sales tax. The retailer may keep 2% of the sales tax collected. Posner Co. records the sales tax in the Sales Revenue account. The amount recorded in the Sales Revenue account during May was $251,450. -The amount of sales taxes (to the nearest dollar) for May is

A company is legally obligated for the costs associated with the retirement of a long-lived asset

Roxy Co., which has a taxable payroll of $600,000, 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 Roxy Co.?

When is a contingent liability recorded?

A company can exclude a short-term obligation from current liabilities if it intends to refinance the obligation and has an unconditional right to defer settlement of the obligation for at least 12 months following the due date.

Slack Inc. borrowed $320,000 on April 1. The note requires interest at 12% and principal to be paid in one year. How much interest is recognized for the period from April 1 to December 31?

An onerous contract is one in which the unavoidable costs of satisfying the obligations outweigh the economic benefits to be received.