Exam 9: Current Liabilities and Contingent Obligations

List five examples of liabilities whose amounts are determined by operating activities.

As a tutor for beginning accounting students, you are reviewing the first balance sheet of one of your students. You make the comment that current liabilities can be classified into three groups and your student does not believe you. Required: Write a brief note that identifies the three groups, including an explanation of the nature of the accounts included in each group.

JST Services employs 50 workers who are each paid $900 per week. JST allows each employee two weeks of paid vacation per year. In addition, the company allows each employee one week of paid sick leave per year. No employees used vacation days or sick leave in the first quarter. In April, a total of three weeks of vacation and one week of sick leave were used by various employees. Required: a. Prepare the journal entry to record JST's quarterly liability for compensated absences on March 31. Ignore payroll taxes.) b. Prepare the April 30 journal entry to record the payment of four weeks of payroll, which includes the employee use of compensated absences. Ignore payroll taxes.)

King Sales sells a certain product for $20,000. Included in this price is an implied service-type warranty of $600. Fifty machines were sold in 2016. Warranty expense incurred during 2016 amounted to $35,000. Which of the following entries would King Sales probably not make in 2016?

Vacation pay and year-end bonuses would be considered legal liabilities.

Exhibit 9-2 In 2015, the Magtag Company sold 16,000 ovens. Magtag estimated that 14% of the machines would require repairs under the two-year assurance-type warranty at an average cost of $60. During 2015, Magtag had an actual outlay of $62,000 for repairs under warranty. Magtag uses the GAAP approach of accruing warranty expense and the related liability) in the year of the sale. -Refer to Exhibit 9-2. What amount should the company report for estimated liability under warranties at the end of 2015?

The modified cash basis to determine warranty expense

Short-term debt that is expected to be refinanced on a long-term basis may be excluded from the current liability classification if the company has the intent to refinance or the ability to refinance.

Albert Corp. introduced a new machine on January 1, 2016. The machine carried a two-year assurance-type warranty against defects. The estimated warranty costs related to dollar sales were 3% in the year of sale and 5% in the year after sale. Additional information follows: Actual Warranty If the company uses the GAAP approach of accruing warranty expense and the related liability) in the year of the sale, what amount relating to warranty expense should be reflected on the December 31, 2017 income statement?

Baynard Boats, Inc. presented the following information for the year ending 2016. 1) Compute the Quick Ratio/Acid Test Ratio 2) Compute the Current Ratio

Which of the following statements does not describe an essential characteristic of a liability?

Which payroll tax is imposed on both the employee and the employer?

Cooper's inventory has been financed 100% with a long-term note. The note is coming due in 2016. Cooper has received a commitment from a new lender that permits five-year refinancing of debt up to an amount equal to 50% of inventory, which is expected to range between $14,000 and $20,000 in 2016. At December 31, 2015, how much of the company's currently maturing note payable can be classified as long-term debt?

Assume that a company is facing a loss contingency. GAAP requires the company to categorize the likelihood of occurrence of a future event that will confirm the loss as being plausible, remotely plausible, or remote.

Jennifer Cakes places a coupon in each box of its product. Customers may send in five coupons and $3, and the company will send them a recipe book. Sufficient books were purchased at a cost of $5 each. A total of 400,000 boxes of product were sold in 2016. It was estimated that 6% of the coupons would be redeemed. During 2016, 8,000 coupons were redeemed. Which entry should be made at December 31, 2016?

The FASB is concerned with the accurate portrayal of liquidity because users evaluate future cash flows in their decision making practices.

The FASB recommends that assets and liabilities with differing liquidities be arranged as separate items in the balance sheet.

The Park Company is affected by the following contingencies at the end of 2016: 1) Expropriation of Park's foreign assets, valued at $3,000,000, appears reasonably possible. 2) Parks' legal counsel has concluded that it is probable that the company will be required to pay damages of $500,000 in a lawsuit. 3) It appears remotely possible that a major customer will be unable to repay Parks on a note receivable for $100,000. 4) Parks' controller estimates that $250,000 of the company's pledged receivables are likely to be uncollectible, and the lender will require Parks to honor the amounts. What total amount should Parks accrue for loss contingencies in 2016?

GAAP relating to compensated absences

Which is not a characteristic of a liability?