Exam 13: Current Liabilities and Contingencies

Sunnyvale Computer Company sells a line of computers that carry a six-month warranty. Customers are offered the opportunity to buy a two-year extended warranty for an additional charge. During 2018, Sunnyvale received $320,000 from customers for these extended warranties. All sales are on credit, and funds are received evenly throughout the year and the warranties go into effect immediately after purchase. Required: Prepare a summary journal entry to record sales of the extended warranties. Also prepare any other entries associated with the warranties that should be recorded during 2018.

Fusion, Inc. introduced a new line of circuits in 2018 that carry a four-year warranty against manufacturer's defects. Based on experience with previous product introductions, warranty costs are expected to approximate 3% of sales. Sales and actual warranty expenditures for the first year of selling the product were: Required: 1. Does this situation represent a loss contingency? Why or why not? How should it be accounted for? 2. Prepare journal entries that summarize sales of the circuits (assume all credit sales) and any aspects of the warranty that should be recorded during 2018. 3. What amount should Fusion report as a liability at December 31, 2018?

Concept 1 Office Products sells office electronics that carry a 60-day manufacturer's warranty. At the time of purchase, customers are offered the opportunity to also buy a 1-year or 2-year extended warranty for an additional charge. Required: 1. Does the sale of the extended warranty represent a loss contingency? 2. Provide journal entries for the extended warranty sales and revenue recognition.

The cost of promotional offers should be recorded as expenses in the accounting period when the offers are redeemed by customers.

State and Federal Unemployment Taxes (SUTA and FUTA) must be withheld from employees' wages.

On October 31, 2018, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. The stated discount rate is 8%. Sky's effective interest rate on this loan is:

On November 1, 2018, a $216,000, 9-month, noninterest-bearing note is issued at a 10% discount rate. Required: 1. Prepare the appropriate journal entry to record the issuance of the note. 2. Determine the effective interest rate. 3. Prepare the appropriate journal entry on December 31, 2018, to record interest on the note for the 2018 financial statements. 4. Prepare the appropriate journal entry(s) on July 31, 2019, to record interest and the payment of the note.

The following selected transactions relate to liabilities of Rose Dish Corporation. Rose's fiscal year ends on December 31. Required: Prepare the appropriate journal entries through the maturity of each liability. 2018 Feb. 3 Negotiated a revolving credit agreement with Second Bank, which can be renewed annually upon bank approval. The amount available under the line of credit is $30,000,000 at the bank's prime rate. April 1 Arranged a 3-month bank loan of $12 million with Second Bank under the line of credit agreement. Interest at the prime rate of 8% was payable at maturity. July 1 Paid the 8% loan at maturity. Nov. 1 Supported by the credit agreement, issued $20 million of commercial paper on a 9-month note. Interest was discounted at issuance at a 6% discount rate. Dec. 31 Recorded any necessary adjusting entry(s). 2019 Aug. 1 Paid the commercial paper at maturity.

Albertson Corporation began a special promotion in July 2018 in an attempt to increase sales. A coupon was provided at various grocery stores upon checkout. Customers could send in five coupons to receive $3.00. Albertson's management estimated that 80% of the coupons would be redeemed. For the six months ended December 31, 2018, the following information is available: Required: What is the estimated liability associated with the coupons at December 31, 2018?

A discount on a noninterest-bearing note payable is classified in the balance sheet as:

On September 1, 2018, Triton Entertainment borrowed $24 million cash to fund a new Fun Park. The loan was made by Nevada Bank under a noncommitted short-term financing arrangement. Triton issued a 9-month, 12% promissory note. Interest was payable at maturity. Triton's fiscal period is the calendar year. Required: 1. Prepare the journal entry for the issuance of the note by Triton. 2. Prepare the appropriate adjusting entry for the note by Triton on December 31, 2018. 3. Prepare the journal entry for the payment of the note at maturity.

A disclosure note is required for all material loss contingencies for which the probability of loss is reasonably possible.

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 promotional expense in 2019?

At December 31, 2018, Cordova Leather's liabilities include the following: 1. $15 million of noncallable 9% notes were issued for $15 million on August 31, 1994. The notes mature on July 31, 2019. Sufficient cash is expected to be available to retire the notes at maturity. 2. $30 million of 8% notes were issued for $30 million on May 31, 2014. The notes mature on May 31, 2024, but investors have the option of calling (demanding payment on) the notes on June 30, 2019. However, the call option is not expected to be exercised, given prevailing market conditions. 3. $18 million of 10% notes are due on March 31, 2020. A debt covenant requires Cordova to maintain current assets at least equal to 150% of its current liabilities. On December 31, 2018, Cordova is in violation of this covenant. Cordova obtained a waiver from Village Bank until June 2019, having convinced the bank that the company's normal 2 to 1 ratio of current assets to current liabilities will be reestablished during the first half of 2019. Required: For each of the three liabilities, indicate the portion of the debt that can be excluded from classification as a current liability (that is, reported as a noncurrent liability). Explain.

The most common type of liability is: