Deck 13: Current Liabilities and Contingencies

Question 1

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

Answer 1

True

Question 2

The most common type of liability is:

A)One that comes into existence due to a loss contingency.
B)One that must be estimated.
C)One that comes into existence due to a gain contingency.
D)One to be paid in cash and for which the amount and timing are known.

Answer 2

D

Question 3

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

Answer 3

True

Question 4

Amounts withheld from employees in connection with payroll often represent liabilities to third parties.

Question 5

A customer advance produces a liability that is satisfied when the product or service is provided.

Question 6

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

Question 7

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

Question 8

Which of the following is not a liability?

A)An unused line of credit.
B)Estimated income taxes.
C)Sales tax collected from customers.
D)Advances from customers.

Question 9

Current liabilities normally are recorded at their:

A)Present value.
B)Cost.
C)Maturity amount.
D)Expected value.

Question 10

For a loss contingency to be accrued, the claim must have been made before the accounting period ended.

Question 11

Some liabilities are not contractual obligations and may not be payable in cash.

Question 12

Warranty expense is recorded along with the related liability in the reporting period in which the product under warranty is sold.

Question 13

All of the following but one represent collections for third parties. Which one of the following is not a collection for a third party?

A)Sales tax payable.
B)Customer deposits.
C)Employee insurance deductions.
D)Social security taxes deductions.

Question 14

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.

Question 15

Which of the following is the best definition of a current liability?

A)An obligation payable within one year.
B)An obligation payable within one year of the balance sheet date.
C)An obligation payable within one year or within the normal operating cycle, whichever is longer.
D)An obligation expected to be satisfied with current assets or by the creation of other current liabilities.

Question 16

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

Question 17

Long-term debt that is callable by the creditor in the upcoming year should be classified as a current liability only if the debt is expected to be called.

Question 18

The key accounting considerations relating to accounts payable are:

A)Determining their existence and ensuring that they are recorded in the appropriate accounting period.
B)Determining their present value and ensuring that they are recorded in the appropriate accounting period.
C)Determining their existence and determining the correct amount.
D)Determining the present value of the principal and the amount of the interest.

Question 19

Current liabilities are normally recorded at the amount expected to be paid rather than at their present value. This practice can be supported by GAAP according to the concept of:

A)Matching.
B)Consistency.
C)Materiality.
D)Conservatism.

Question 20

Which of the following is not a characteristic of a liability?

A)It represents a probable, future sacrifice of economic benefits.
B)It must be payable in cash.
C)It arises from present obligations to other entities.
D)It results from past transactions or events.

Question 21

Universal Travel Inc. borrowed $500,000 on November 1, 2009, and signed a 12-month note bearing interest at 6%. Interest is payable in full at maturity on October 31, 2010. In connection with this note, Universal Travel Inc. should report interest payable at December 31, 2009, in the amount of:

A)$ 8,000.
B)$30,000.
C)$ 5,000.
D)$25,000.$500,000 6% 2/12 = $5,000

Question 22

Lake Co. receives nonrefundable advance payments with special orders for containers constructed to customer specifications. Related information for 2009 is as follows ($ in millions): What amount should Lake report as a current liability for advances from customers in its Dec. 31, 2009, balance sheet?

A)$0.
B)$80 .
C)$125.
D)$170.

Question 23

On June 1, 2009, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. What is the carrying value of the note as of September 30, 2009?

A)$525,000.
B)$300,000.
C)$495,000.
D)$475,000.

Question 24

Classifying liabilities as either current or long-term helps creditors assess:

A)Profitability.
B)The relative risk of a firm's liabilities.
C)The degree of a firm's liabilities.
D)The amount of a firm's liabilities.

Question 25

Oklahoma Oil Corp. paid interest of $785,000 during 2009, and the interest payable account decreased by $125,000. What was interest expense for the year?

A)$890,000.
B)$660,000.
C)$555,000.
D)$785,000.

Question 26

On January 1, 2009, G Corporation agreed to grant its employees two weeks vacation each year, with the stipulation that vacations earned each year can be taken the following year. For the year ended December 31, 2009, G's employees each earned an average of $800 per week. 500 vacation weeks earned in 2009 were not taken during 2009. Wage rates for employees rose by an average of 5 percent by the time vacations actually were taken in 2010. What is the amount of G's 2010 wages expense related to 2009 vacation time?

A)$ 0
B)$ 20,000
C)$400,000
D)$420,000 (500 $800) 1.05% = $420,000

Question 27

M Corp. has an employee benefit plan for compensated absences that gives employees 15 paid vacation days. Vacation days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days. At December 31, 2009, M's unadjusted balance of liability for compensated absences was $30,000. M estimated that there were 200 vacation days available at December 31, 2009. M's employees earn an average of $150 per day. In its December 31, 2009, balance sheet, what amount of liability for compensated absences is M required to report?

A)$ 0.
B)$ 30,000.
C)$225,000.
D)$450,000.The liability for compensated absences at December 31, 2009, is $30,000 for the 200 vacation days times $150 per day.

Question 28

The rate of interest printed on the face of a note payable is called the:

A)Yield rate.
B)Effective rate.
C)Market rate.
D)Stated rate.

Question 29

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:

A)Liabilities until the product or service is provided.
B)A component of shareholders' equity.
C)Long-term assets until the product or service is provided.
D)Revenue upon receipt of the advance payment.

Question 30

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

A)An asset.
B)A component of shareholders' equity.
C)A contingent liability.
D)A contra liability.

Question 31

Branch Company, a building materials supplier, has $18,000,000 of notes payable due April 12, 2010. At December 31, 2009, Branch signed an agreement with First Bank to borrow up to $18,000,000 to refinance the notes on a long-term basis. The agreement specified that borrowings would not exceed 75% of the value of the collateral that Branch provided. At the date of issue of the December 31, 2009, financial statements, the value of Branch's collateral was $20,000,000. On its December 31, 2009, balance sheet, Branch should classify the notes as follows:

A)$15,000,000 long-term and $3,000,000 current liabilities.
B)$4,500,000 short-term and $13,500,000 current liabilities.
C)$18,000,000 of current liabilities.
D)$18,000,000 of long-term liabilities.

Question 32

Knique Shoes issued a $100,000, 8-month, "noninterest-bearing note." The loan was made by Second Commercial Bank whose stated "discount rate" is 9%. The effective interest rate on this loan is:

A)9.28%
B)9.49%
C)9.50%
D)9.57% $100,000 9% 8/12 = $6,000
$6,000 / ($100,000 $6,000) = 6.38%
3)38% 12/8 = 9.57%

Question 33

B Corp. has an employee benefit plan for compensated absences that gives employees 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, 2009, B's unadjusted balance of liability for compensated absences was $42,000. B estimated that there were 300 vacation days and 150 sick days available at December 31, 2009. B's employees earn an average of $200 per day. In its December 31, 2009, balance sheet, what amount of liability for compensated absences is B required to report?

A)$ 60,000.
B)$ 84,000.
C)$ 90,000.
D)$144,000.The liability for compensated absences at December 31, 2009, is $60,000 for the 300 vacation days times $200 per day.The key word in dealing with sick pay is the word "required".The problem asks what is the liability required at December 31, 2009.Since the accrual of sick pay is optional, B Corp.would not be required to accrue a liability for sick pay.

Question 34

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

A)A current liability.
B)Revenue.
C)Shareholders' equity.
D)Paid-in capital.

Question 35

The rate of interest that actually is incurred on a note payable is called the:

A)Face rate.
B)Contract rate.
C)Effective rate.
D)Stated rate.

Question 36

Jane's Donut Co. borrowed $200,000 on January 1, 2009, and signed a two-year note bearing interest at 12%. Interest is payable in full at maturity on January 1, 2011. In connection with this note, Jane's should report interest expense at December 31, 2009, in the amount of:

A)$0.
B)$24,000.
C)$48,000.
D)$50,880.$200,000 12% 12/12 = $24,000

Question 37

When a deposit on returnable containers is forfeited, the firm holding the deposit will experience:

A)A decrease in cost of goods sold.
B)An increase in current liabilities.
C)An increase in accounts receivable.
D)An increase in revenue.

Question 38

On October 31, 2009, Simeon Builders borrowed $16 million cash and issued a 7-month, noninterest-bearing note. The loan was made by Star Finance Co. whose stated discount rate is 8%. Sky's effective interest rate on this loan is:

A)More than the stated discount rate of 8%.
B)Less than the stated discount rate of 8%.
C)Equal to the stated discount rate of 8%.
D)Unrelated to the stated discount rate of 8%.

Question 39

What is the effective interest rate on a 3-month, noninterest-bearing note with a stated rate of 12% and a maturity value of $200,000?

A)12.36%.
B)12.00 %.
C)11.46%.
D)3.00%.$200,000 12% 3/12 = $6,000 $6,000/($200,000 $6,000) = 3.09%
3)09% 12/3 = 12.36%

Question 40

On September 1, 2009, Hiker Shoes issued a $100,000, 8-month, noninterest-bearing note. The loan was made by Second Commercial Bank whose stated discount rate is 9%. Hiker's effective interest rate on this loan is:

A)9.00%.
B)9.49%.
C)9.50%.
D)9.57%.$100,000 9% 8/12 = $6,000 [$6,000/($100,000 $6,000)] 12/8 = 9.57%

Question 41

A contingent loss should be reported in a footnote to the financial statements rather than being accrued if:

A)The likelihood of a loss is remote.
B)The incurrence of a loss is reasonably possible.
C)The incurrence of a loss is more likely than not.
D)The likelihood of a loss is probable.

Question 42

A long-term liability should be reported as a current liability in a classified balance sheet if the long-term debt

A)is callable by the creditor.
B)is secured by adequate collateral.
C)will be refinanced with stock.
D)will be refinanced with debt.

Question 43

Which of the following may create employer liabilities in connection with their payrolls?

A)Employee withholding taxes
B)Employee voluntary deductions
C)Employee fringe benefits
D)All of these are correct.

Question 44

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

A)Realized.
B)The amount can be reasonably estimated.
C)The gain is reasonably possible and the amount can be reasonable estimated.
D)The gain is probable and the amount can be reasonably estimated.

Question 45

Large, highly rated firms sometimes sell commercial paper:

A)To borrow funds at a lower rate than through a bank.
B)To earn a profit on the paper.
C)To avoid paperwork.
D)Because the interest rate is locked in by the Federal Reserve Board.

Question 46

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

A)More likely than not and the amount of the loss is known.
B)At least reasonably possible and the amount of the loss is known.
C)At least reasonably possible and the amount of the loss can be reasonably estimated.
D)Probable and the amount of the loss can be reasonably estimated.

Question 47

Other things being equal, most managers would prefer to report liabilities as noncurrent rather than current. The logic behind this preference is that the long-term classification permits the company to report:

A)Higher working capital and a higher inventory turnover.
B)Lower working capital and a higher current ratio.
C)Higher working capital and a higher current ratio.
D)Higher working capital and a lower debt to equity ratio.

Question 48

On December 31, 2009, L, Inc. had a $1,500,000 note payable outstanding, due July 31, 2010. L borrowed the money to finance construction of a new plant. L planned to refinance the note by issuing long-term bonds. Because L temporarily had excess cash, it prepaid $500,000 of the note on January 23, 2010. In February 2010, L completed a $3,000,000 bond offering. L will use the bond offering proceeds to repay the note payable at its maturity and to pay construction costs during 2010. On March 13, 2010, L issued its 2009 financial statements. What amount of the note payable should L include in the current liabilities section of its December 31, 2009, balance sheet?

A)$ 0
B)$ 500,000
C)$1,000,000
D)$1,500,000 SFAS #6 states that the amount excluded from current liabilities through refinancing cannot exceed the amount actually refinanced.Therefore, L should consider the $1,000,000 paid by the refinancing to be a long-term liability and the $500,000 a current liability in the December 31, 2009 balance sheet.The refinancing was completed before the issuance of the financial statements and meets both criteria (intent & financial ability) for the classification of the $1,000,000 as a long-term liability.

Question 49

Clark's Chemical Company received customer deposits on returnable containers in the amount of $100,000 during 2009. Twelve percent of the containers were not returned. The deposits are based on the container cost marked up 20%. What is cost of goods sold relative to this forfeiture?

A)$0.
B)$2,000.
C)$10,000.
D)$14,400.($100,000 12%) 120% = $10,000

Question 50

Of the following, which typically would not be classified as a current liability?

A)Estimated liability from cash rebate program.
B)A long-term note payable maturing within the coming year.
C)Rent revenue received in advance.
D)A six-month bank loan to be paid with the proceeds from the sale of common stock.

Question 51

Which of the following is not a current liability?

A)Accounts payable.
B)A note payable due in 2 years.
C)Accrued interest payable.
D)Sales tax payable.

Question 52

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

A)The firm has a long-term line of credit.
B)The firm has tentative plans to issue long-term bonds.
C)The firm intends to and has the ability to refinance as long-term.
D)The firm has the ability to refinance on a long-term basis.

Question 53

When a product or service is delivered for which a customer advance has been previously received, the appropriate journal entry includes:

A)A debit to a revenue and a credit to a liability account.
B)A debit to a revenue and a credit to an asset account.
C)A debit to an asset and a credit to a revenue account.
D)A debit to a liability and a credit to a revenue account.

Question 54

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

A)The company is being sued and a loss is reasonably possible and reasonably estimable.
B)The company deducts life insurance premiums from employees' paychecks.
C)The company offers a two-year warranty and the expenses can be reasonably estimated.
D)It is probable that the company will receive $100,000 in settlement of a lawsuit.

Question 55

Paul Company issues a product recall due to an apparently pre-existing and material defect discovered after the end of its fiscal year. Financial statements have not yet been issued. The action required of Paul Company for this reasonably estimable contingency for the year just ended is:

A)To disclose it in a footnote.
B)To accrue a long-term liability.
C)To accrue the liability and explain it in a footnote.
D)To do nothing relative to the contingency.

Question 56

Which of the following situations would not require that long-term liabilities be reported as current liabilities on a classified balance sheet?

A)The long-term debt is callable by the creditor.
B)The creditor has the right to demand payment due to a contractual violation.
C)The long-term debt matures within the upcoming year.
D)All of these require the current classification.

Question 57

Footnote disclosure is required for material potential losses when the loss is at least reasonably possible:

A)Only if the amount is known.
B)Only if the amount is known or reasonably estimable.
C)Unless the amount is not reasonably estimable.
D)Even if the amount is not reasonably estimable.

Question 58

In May of 2009, Raymond Financial Services became involved in a penalty dispute with the EPA. At December 31, 2009, the environmental attorney for Raymond indicated that an unfavorable outcome to the dispute was probable. The additional penalties were estimated to be $770,000 but could be as high as $1,170,000. After the year-end, but before the 2009 financial statements were issued, Raymond accepted an EPA settlement offer of $900,000. Raymond should have reported an accrued liability on its December 31, 2009, balance sheet of:

A)$ 770,000.
B)$ 900,000.
C)$ 970,000.
D)$1,170,000.

Question 59

Slotnick Chemical received customer deposits on returnable containers in the amount of $300,000 during 2009. 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?

A)$0.
B)$7,500.
C)$9,000.
D)$45,000.

Question 60

A loss contingency should be accrued in a company's financial statements only if the likelihood that a liability has been incurred is:

A)at least remotely possible and the amount of the loss is known.
B)reasonably possible and the amount of the loss is known.
C)reasonably possible and the amount of the loss can be reasonably estimated.
D)probable and the amount of the loss can be reasonably estimated.

Question 61

Red 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 probable, a loss contingency should be

A)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Question 62

During 2009, Deluxe Leather Goods sold 800,000 reversible belts under a new sales promotional program. Each belt carried one coupon, which entitles the customer to a $5.00 cash rebate. Deluxe estimates that 70% of the coupons will be redeemed, even though only 350,000 coupons had been processed during 2009. At December 31, 2009, Deluxe should report a liability for unredeemed coupons of:

A)$ 560,000.
B)$1,050,000.
C)$1,225,000.
D)$1,750,000.[($800,000 70%) 350,000] $5 = $1,050,000

Question 63

The accounting concept that requires recognition of a liability for customer premium offers is

A)Periodicity.
B)Conservatism.
C)Historical cost.
D)The matching principle.

Question 64

What is the rebate promotion liability that Holyoak should report in its December 31, 2009 balance sheet?

A)$20,000
B)$28,000
C)$18,000
D)None of these is correct.This is (8,500 expected 7,100 paid) $20 = $28,000.

Question 65

Which of the following entail essentially the same accounting treatment?

A)Coupons for cash rebates and coupons for other premiums.
B)Cents-off coupons and coupons for other premiums.
C)Cents-off coupons and coupons for cash rebates.
D)All of these are correct.

Question 66

Captain Cook Cereal includes one coupon in each package of Granola that it sells and offers a puzzle in exchange for $2.00 and 3 coupons. The puzzles cost Captain Cook $3.50 each. Experience indicates that 20% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Captain Cook sold 6 million boxes of Granola and 900,000 of the coupons were redeemed. What amount should Captain Cook report as a liability for coupons on its December 31, 2009, balance sheet?

A)$ 0.
B)$150,000.
C)$300,000.
D)$450,000.[(6,000,000 20%) 900,000] / 3 = 100,000 puzzles 100,000 ($3.50 $2.00) = $150,000

Question 67

Accounting for costs of incentive programs for frequent customer purchases involves:

A)Recording an expense and a liability each period.
B)Recording a liability and a reduction of revenue each period.
C)Recording an expense and an asset reduction each period.
D)Recording an expense and revenue each period.

Question 68

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)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Question 69

What is the expense that Holyoak should report for its promotional rebates in its 2009 income statement?

A)$142,000
B)$152,000
C)$170,000
D)$200,000 This is the expected amount to be claimed from 2009 sales; i.e., $20 10,000 .85.

Question 70

The cost of customer premium offers should be charged to expense:

A)When the related product is sold.
B)When the premium offer expires.
C)Over the life cycle of the product to which the premium relates.
D)When the premiums are claimed.

Question 71

At the beginning of 2009, Angel Corporation began offering a 2-year warranty on its products. The warranty program was expected to cost Angel 4% of net sales. Net sales made under warranty in 2009 were $180 million. Fifteen percent of the units sold were returned in 2009 and repaired or replaced at a cost of $5.3 million. The amount of warranty expense on Angel's 2009 income statement is:

A)$ 5.3 million.
B)$ 7.2 million.
C)$10.6 million.
D)$27.0 million.$180 million 4% = $7.2 million

Question 72

Funzy Cereal includes one coupon in each package of Wheatos that it sells and offers a toy car in exchange for $1.00 and 3 coupons. The cars cost Funzy $1.50 each. Experience indicates that 40% of the coupons eventually will be redeemed. During the last month of 2009, the first month of the offer, Funzy sold 12 million boxes of Wheatos and 2.4 million of the coupons were redeemed. What amount should Funzy report as a promotional expense for coupons on its December 31, 2009, income statement?

A)$ 0.
B)$ 400,000.
C)$ 800,000.
D)$1,200,000.[(12,000,000 40%) / 3] ($1.50 $1.00) = $800,000

Question 73

Volt Electronics sells equipment that includes a three-year warranty. Repairs under the warranty are performed by an independent service company under contract with Volt. Based on prior experience, warranty costs are estimated to be $25 per item sold. Volt should recognize these warranty costs:

A)When the equipment is sold.
B)When the repairs are performed.
C)When payments are made to the service firm.
D)Evenly over the life of the warranty.

Question 74

Accounting for costs of incentive programs for customer purchases:

A)Requires probability estimation.
B)Follows the matching principle.
C)Is a loss contingency situation.
D)All of these are correct.

Question 75

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

A)Disclosed but not accrued as a liability.
B)Disclosed and accrued as a liability
C)Accrued as liability but not disclosed.
D)Neither accrued as a liability nor disclosed.

Question 76

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

A)Reported in the income statement and disclosed.
B)Offset against shareholders' equity.
C)Disclosed, but not recognized in the income statement.
D)Neither recognized in the income statement nor disclosed.

Question 77

The main difference between accounting for rebate and cash discount coupons is:

A)The latter is not treated as an expense.
B)Only the former creates a contingent liability when issued.
C)The expense for the latter is deferred until redemption of the coupon.
D)There are no significant differences in accounting between the two.

Question 78

Z Co. filed suit against W, Inc. in 2009 seeking damages for patent infringement. At December 31, 2009, legal counsel for Z believed that it was probable that Z would be successful against W for an estimated amount in the range of $30 million to $60 million, with each amount in that range considered equally likely. Z was awarded $40 million in April 2010. Z should report this award in its 2009 financial statements, issued in March, 2010 as

A)A receivable and unearned revenue of $40 million.
B)A receivable and revenue of $40 million.
C)A disclosure of a gain contingency of $40 million.
D)A disclosure of a gain contingency of an undetermined amount in the range of $30 million to $60 million.SFAS #5 states that gain contingencies should not be recognized in the financial statements until realized.Adequate disclosure should be made in the footnotes but care should be taken to avoid misleading implications as to the likelihood of realization of the contingent gain.

Question 79

Which of the following is a contingency that would most likely require accrual?

A)Potential losses from extended warranties.
B)Customer premium offers.
C)Potential liability on a product where none have yet been sold.
D)Sales tax payable.

Question 80

Providing a monetary rebate program for purchasing a product:

A)Is accounted for similarly to product warranties.
B)Creates an expense for the seller in the period of sale.
C)Creates a contingent liability for the seller at the time of sale.
D)All of these are correct.