Exam 13: Current Liabilities and Contingencies

Barbara Muller Services (BMS) pays its employees monthly. The payroll information listed below is for January 2018, the first month of BMS's fiscal year. Assume none of the employees' earnings reached $7,000 during the month. The journal entry to record payroll for the January 2018 pay period will include a debit to payroll tax expense of:

Kline Company refinanced current debt as long-term debt on January 5, 2019. Kline's fiscal year ended on December 31, 2018, and its financial statements will be issued sometime in early March 2019. Under IFRS, how would Kline classify the debt on its December 31, 2018, balance sheet?

Texon Oil is being sued for price fixing and environmental damage. The litigation started this year and is expected to last five years. There is no doubt that Texon is guilty, but the settlement cost will be between $3 billion and $22 billion. Briefly explain how Texon would address this in its current year financial statements.

Unlike the Social Security tax there is no maximum wage base for the Medicare portion of the FICA tax.

Identify and define the three classifications prescribed by GAAP regarding accounting for contingencies to identify the range of possibilities for the likelihood of a confirming event for contingent liabilities. Describe the accounting action to be taken for each term.

Which of the following is true about the initial journal entry used to record extended warranties?

A company should accrue a liability for a loss contingency if it is at least reasonably possible that assets have been impaired and the amount of potential loss can be reasonably estimated.

At times, businesses require advance payments from customers that will be applied to the purchase price when goods are delivered or services provided. These customer advances represent:

Which of the following is not a liability?

The key accounting considerations relating to accounts payable are:

In its 2018 annual report to shareholders, Ank-Morpork Times Inc. included the following disclosure: Revenue Recognition • Advertising revenue is recognized when advertisements are published, are broadcast, or when placed on the Company's websites, net of provisions for estimated rebates, credit and rate adjustments and discounts. • Circulation revenue includes single copy and home-delivery subscription revenue. Single copy revenue is recognized based on date of publication, net of provisions for related returns. Proceeds from home-delivery subscriptions and related costs, principally agency commissions, are deferred at the time of sale and are recognized in earnings on a pro rata basis over the terms of the subscriptions. • Other revenue is recognized when the related service or product has been delivered. Also, the following information on its current liabilities was included in its comparative balance sheets: Required: Assuming that Ank-Morpork Times Inc. collected $440,000,000 in cash for home-delivery subscriptions during fiscal year 2018, what amount of revenue did it recognize during 2018 from this source? Show the relevant T-account information to support your answer.

A customer of Razor Sharpeners alleges that Razor's new razor sharpener had a defect that resulted in serious injury to the customer. Razor believes the customer has a 51% chance of winning the case, and that if the customer wins the case, there is a range of losses of between $1,000,000 and $3,000,000 in which any number is equally likely to occur. Under IFRS, Razor should accrue a liability in the amount of:

Under IFRS, a liability that is refinanced after the balance sheet date but before the financial statements are issued would typically be classified as a current liability.

General Product Inc. distributed 100 million coupons in 2018. The coupons are redeemable for 30 cents each. General anticipates that 70% of the coupons will be redeemed. The coupons expire on December 31, 2019. There were 45 million coupons redeemed in 2018 and 30 million redeemed in 2019. - What was General's coupon promotion expense in 2018?

Gain contingencies usually are recognized in a company's income statement when:

In 2018, Holyoak Inc. offers a coupon for $20 off qualifying purchases of its new line of products. Holyoak sold 10,000 of these products during the year. By year-end of 2018, 7,100 had been redeemed and the $20 reduction of purchase price provided to customers. Holyoak's historical experience with such coupons indicates that 85% of customers use the coupon. - What is the expense that Holyoak should report for its promotional coupons in its 2018 income statement?

Muller Corp. pays its employees monthly. The payroll information listed below is for January 2018, the first month of Muller's fiscal year. Required: Prepare the appropriate journal entries to record salaries and wages expense and payroll tax expense for the January 2018 pay period.

Which of the following is a contingency that should be accrued?

Hardin Widget Manufacturing began operations in January 2018. Hardin sells widgets that carry a two-year manufacturer's warranty against defects in workmanship. Hardin's management projects that 2% of the widgets will require repair during the first year of the warranty while approximately 6% will require repair during the second year of the warranty. The widgets sell for $400 each. The average cost to repair a widget is $50. The company sells 60% of the widgets to retail customers who must pay a 6% sales tax. Sales and warranty information for 2018 and 2019 are as follows: 2018: Sold 200 widgets on account; incurred warranty expenditures of $300. 2019: Sold 300 widgets on account; actual warranty expenditures were $500. Required: 1. Prepare journal entries that summarize the sales and any aspects of the warranty for 2018. 2. Prepare journal entries that summarize the sales and any aspects of the warranty for 2019.

When a material gain contingency is probable and the amount of gain can be reasonably estimated, the gain should be: