Exam 13: Current Liabilities and Contingencies

At the beginning of 2018, Scarlet Industries began providing a three-year warranty on its products. The warranty program was expected to cost Scarlet 2% of net sales, approximately equally over the three-year warranty period. Net sales made under warranty in 2018 were $270 million. Thirteen percent of the units sold were returned in 2018 and repaired or replaced at a cost of $2 million. This amount was debited to warranty expense as incurred. Required: Prepare the appropriate adjusting entry to adjust warranty expense on December 31, 2018. Show calculations.

During the year, L&M Leather Goods sold 1,000,000 reversible belts under a new sales promotional program. Each belt carried one rebate certificate which entitles the customer to a $4.00 cash refund when the rebate is submitted for redemption. L&M estimates that 70% of the rebates will be redeemed. 500,000 rebates had been submitted for redemption during the year. At December 31, L&M should report a liability for unredeemed rebate certificates of:

Blue Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If the likelihood of expropriation is remote, a loss contingency should be:

A company should accrue a loss contingency only if the likelihood that a liability has been incurred is:

B Corp. has an employee benefit plan for compensated absences that gives each employee 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 2018, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 total vacation days and 150 sick days available at December 31, 2018. B's employees earn an average of $200 per day. In its December 31, 2018, balance sheet, what amount of liability for compensated absences is B required to report?

Which of the following is not a current liability?

In the current year, Hanna Company reported quality-assurance warranty expense of $190,000 and the warranty liability account increased by $20,000. What were warranty expenditures during the year?

Slotnick Chemical received $300,000 from customers as deposits on returnable containers during 2018. Fifteen percent of the containers were not returned. The deposits are based on the container cost marked up 20%. How much profit did Slotnick realize on the forfeited deposits?

The following facts apply to TinyPart Toy Company's pending litigation as of December 31, 2018: a. TinyPart is defending against a lawsuit and believes there is a 51% chance it will lose in court. If it loses, TinyPart estimates that damages will be $100,000. b. TinyPart is defending against another lawsuit for which management believes it is virtually certain to lose in court. If it loses the lawsuit, management estimates damages will fall somewhere in the range of $30,000 to $50,000, with each amount in that range equally likely to occur. c. TinyPart is defending against another lawsuit that is identical to item (b), but the relevant losses will only occur far into the future. The present values of the endpoints of the range are $15,000 and $25,000. TinyPart's management believes the effects of time value of money on these amounts are material, but also believes the timing of these amounts is uncertain. d. TinyPart is defending against a fourth lawsuit and believes there is only a 25% chance it will lose in court. If TinyPart loses, it believes damages will fall somewhere in the range of $35,000 to $40,000, with each amount in that range equally likely to occur. -Indicate how TinyPart would disclose or account for the lawsuit described in part (b) under U.S. GAAP and under IFRS in the financial statements for the year ended December 31, 2018.

Ontario Resources, a natural energy supplier, borrowed $80 million cash on November 1, 2018, to fund a geological survey. The loan was made by Quebec Banque under a short-term financing arrangement. Ontario Resources issued a 9-month, 12% promissory note with interest payable at maturity. Ontario Resources' fiscal period is the calendar year. Required: 1. Prepare the journal entry for the issuance of the note by Ontario Resources. 2. Prepare the appropriate adjusting entry for the note by Ontario Resources on December 31, 2018. Show calculations. 3. Prepare the journal entry for the payment of the note at maturity. Show calculations.

A customer of RoughEdge Sharpeners alleges that RoughEdge's new razor sharpener had a defect that resulted in serious injury to the customer. RoughEdge 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 U.S. GAAP, RoughEdge should accrue a liability in the amount of:

Peterson Photoshop sold $1,000 in gift cards on a special promotion on October 15, 2018, and sold $1,500 in gift cards on another special promotion on November 15, 2018. Of the cards sold in October, $100 were redeemed in October, $250 in November, and $300 in December. Of the cards sold in November, $150 were redeemed in November and $350 were redeemed in December. Peterson views the probability of redemption of a gift card as remote if the card has not been redeemed within two months. At 12/31/2018, Peterson would show an deferred revenue account for the gift cards with a balance of:

Orange Co. can estimate the amount of loss that will occur if a foreign government expropriates some of the company's assets in that country. If expropriation is reasonably possible, a loss contingency should be:

When cash is received from customers in the form of a refundable deposit, the cash account is increased with a corresponding increase in:

The concept of substance over form influences the classification of obligations expected to be refinanced.

Short-term obligations can be reported as long-term liabilities if:

Mozart Music Co. began operations in December of 2018. The company sold gift certificates during December in various amounts totaling $1,600. The gift certificates are redeemable for merchandise within three years of the purchase date. However, experience within the industry predicts that 90% of gift certificates will be redeemed within one year. Certificates totaling $500 were presented for redemption during 2018 as part of merchandise purchases having a total retail price of $750. Required: 1. Determine the liability for gift certificates to be reported in the December 31, 2018, balance sheet. 2. What is the appropriate classification (current or noncurrent) of the liabilities at December 31, 2018? Show calculations.

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 liability as of December 31, 2018?

Revenue for gift card breakage should be recognized:

Barone, Inc. is involved with several situations that possibly involve contingencies. Each is described below. Barone's fiscal year ends December 31, and the 2018 financial statements are issued on March 1, 2019. 1. At March 1, 2019, the EPA is in the process of investigating possible chemical leaks at two of Barone's facilities, but has not proposed a deficiency assessment. Management feels an assessment is reasonably possible, and if an assessment is made an unfavorable settlement of up to $8 million is reasonably possible. 2. Barone is the plaintiff in a $33 million lawsuit filed against Faze Corp. for damages due to lost profits from rejected contracts and for unpaid receivables. The case is in final appeal and legal counsel advises that it is probable that Finley will prevail and be awarded $25 million. 3. In July 2017, the State of Arkansas filed suit against Barone, seeking civil penalties and injunctive relief for violations of environmental laws regulating hazardous waste. On February 12, 2019, Barone reached a settlement with state authorities. Based upon discussions with legal counsel, the Company feels it is probable that $13 million will be required to cover the cost of violations. Barone believes that the ultimate settlement of this claim will not have a material adverse effect on the company. 4. Barone is involved in a lawsuit resulting from a dispute with a customer. On January 5, 2019, judgment was rendered against Barone in the amount of $16 million plus interest, a total of $18 million. Barone plans to appeal the judgment and is unable to predict its outcome though it is not expected to have a material adverse effect on the company. Required: 1. Determine the appropriate means of reporting each situation. Explain your reasoning. 2. Prepare any necessary journal entries and disclosure notes.