Question 1

Parton owes $2 million that is due on February 28. The company borrows $1,600,000 on February 25 (5-year note) and uses the proceeds to pay down the $2 million note and uses other cash to pay the balance. How much of the $2 million note is classified as long-term in the December 31 financial statements.

Accepted Answer

A)  $2,000,000. 
B)  $0. 
C)  $1,600,000. 
D)  $400,000.

Question 2

A loss contingency can be accrued when

Accepted Answer

A)  it is certain that funds are available to settle the disputed amount. 
B)  an asset may have been impaired. 
C)  the amount of the loss can be reasonably estimated and it is probable that an asset has been impaired or a liability has been incurred. 
D)  it is probable that an asset has been impaired or a liability incurred even though the amount of the loss cannot be reasonably estimated.

Question 3

Total payroll of Walnut Co. was $1,840,000, of which $320,000 represented amounts paid in excess of $106,800 to certain employees. The amount paid to employees in excess of $7,000 was $1,440,000. Income taxes withheld were $450,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee's salaries and wages to $106,800 and 1.45% in excess of $106,800.
Instructions
(a) Prepare the journal entry for the salaries and wages paid.
(b) Prepare the entry to record the employer payroll taxes.

Accepted Answer

The answer of Total payroll of Walnut Co. was $1,840,000,...

Question 4

For which of the following areas a provision may be recognized in the financial statement?

Accepted Answer

A)  Possibility of war 
B)  Business recession 
C)  Warranties 
D)  Strike

Question 5

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

Accepted Answer

A)  Intend to refinance the obligation on a long-term basis. 
B)  Obligation must be due with one year. 
C)  Demonstrate the ability to complete the refinancing. 
D)  Subsequently refinance the obligation on a long-term basis.

Question 6

Neer Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be

Accepted Answer

A)  zero. 
B)  the maximum of the range. 
C)  the mean of the range. 
D)  the minimum of the range.

Question 7

Qualpoint pays a weekly payroll of $170,000 that includes federal taxes withheld of $25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the effect of assets and liabilities from this transaction?

Accepted Answer

A)  Assets decrease $170,000 and liabilities do not change. 
B)  Assets decrease $128,820 and liabilities increase $41,180. 
C)  Assets decrease $128,820 and liabilities decrease $41,180. 
D)  Assets decrease $110,820 and liabilities increase $59,180.

Question 8

Excom manufactures high-end whole home electronic systems. The company provides a one-year warranty for all products sold. The company estimates that the warranty cost is $225 per unit sold and reported a liability for estimated warranty costs $7.8 million at the beginning of this year. If during the current year, the company sold 60,000 units for a total of $243 million and paid warranty claims of $9,000,000 on current and prior year sales, what amount of liability would the company report on its balance sheet at the end of the current year? (assume accrual method)

Accepted Answer

A)  $2,800,000. 
B)  $4,500,000. 
C)  $12,300,000. 
D)  $13,500,000.

Question 9

For purposes of recognizing a provision "probable" is defined as more likely than not

Accepted Answer

A) True 
 B)False

Question 10

Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is reasonably possible that a liability has been incurred.

Accepted Answer

A) True 
 B)False

Question 11

A company gives each of its 50 employees (assume they were all employed continuously through 2014 and 2015) 12 days of vacation a year if they are employed at the end of the year. The vacation accumulates and may be taken starting January 1 of the next year. The employees work 8 hours per day. In 2014, they made $21 per hour and in 2015 they made $24 per hour. During 2015, they took an average of 9 days of vacation each. The company's policy is to record the liability existing at the end of each year at the wage rate for that year. What amount of vacation liability would be reflected on the 2014 and 2015 balance sheets, respectively?

Accepted Answer

A)  $100,800; $140,400 
B)  $115,200; $144,000 
C)  $100,800; $144,000 
D)  $115,200; $140,400

Question 12

Jump Corporation has $2,500,000 of short-term debt it expects to retire with proceeds from the sale of 85,000 shares of common stock. If the stock is sold for $20 per share subsequent to the balance sheet date, but before the balance sheet is issued, what amount of short-term debt could be excluded from current liabilities?

Accepted Answer

A)  $1,700,000 
B)  $2,500,000 
C)  $800,000 
D)  $0

Question 13

Accrued liabilities are disclosed in financial statements by

Accepted Answer

A)  a footnote to the statements. 
B)  showing the amount among the liabilities but not extending it to the liability total. 
C)  an appropriation of retained earnings. 
D)  appropriately classifying them as regular liabilities in the balance sheet.

Question 14

What is the relationship between present value and the concept of a liability?

Accepted Answer

A)  Present values are used to measure certain liabilities. 
B)  Present values are not used to measure liabilities. 
C)  Present values are used to measure all liabilities. 
D)  Present values are only used to measure long-term liabilities.

Question 15

If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except

Accepted Answer

A)  a general description of the financing arrangement. 
B)  the terms of the new obligation incurred or to be incurred. 
C)  the terms of any equity security issued or to be issued. 
D)  the number of financing institutions that refused to refinance the debt, if any.

Question 16

Which of the following is an example of a contingent liability?

Accepted Answer

A)  Obligations related to product warranties. 
B)  Possible receipt from a litigation settlement. 
C)  Pending court case with a probable favorable outcome. 
D)  Tax loss carryforwards.

Question 17

A company offers a cash rebate of $1 on each $4 package of light bulbs sold during 2014. Historically, 10% of customers mail in the rebate form. During 2014, 3,000,000 packages of light bulbs are sold, and 160,000 $1 rebates are mailed to customers. What is the rebate expense and liability, respectively, shown on the 2014 financial statements dated December 31?

Accepted Answer

A)  $300,000; $300,000 
B)  $300,000; $140,000 
C)  $140,000; $140,000 
D)  $160,000; $140,000

Question 18

Paying a current liability with cash will always reduce the current ratio.

Accepted Answer

A) True 
 B)False

Question 19

On September 1, 2014, Halley Co. issued a note payable to Fidelity Bank in the amount of $1,800,000, bearing interest at 10%, and payable in three equal annual principal payments of $600,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2015. At December 31, 2015, Halley should record accrued interest payable of

Accepted Answer

A)  $66,000. 
B)  $60,000. 
C)  $40,000. 
D)  $132,000.

Question 20

Under what conditions is an employer required to accrue a liability for sick pay?

Accepted Answer

A)  Sick pay benefits can be reasonably estimated. 
B)  Sick pay benefits vest. 
C)  Sick pay benefits equal 100% of the pay. 
D)  Sick pay benefits accumulate.

Exam 13: Current Liabilities and Contingencies

A loss contingency can be accrued when

For which of the following areas a provision may be recognized in the financial statement?

Which of the following is not a condition necessary to exclude a short-term obligation from current liabilities?

Neer Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be

Qualpoint pays a weekly payroll of $170,000 that includes federal taxes withheld of $25,400, FICA taxes withheld of $15,780, and 401(k) withholdings of $18,000. What is the effect of assets and liabilities from this transaction?

For purposes of recognizing a provision "probable" is defined as more likely than not

Companies should accrue an estimated loss from a loss contingency if information available prior to the issuance of financial statements indicates that it is reasonably possible that a liability has been incurred.

Accrued liabilities are disclosed in financial statements by

What is the relationship between present value and the concept of a liability?

If a short-term obligation is excluded from current liabilities because of refinancing, the footnote to the financial statements describing this event should include all of the following information except

Which of the following is an example of a contingent liability?

Paying a current liability with cash will always reduce the current ratio.

Under what conditions is an employer required to accrue a liability for sick pay?